UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[ X ]|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 31, 19961997
or
[ ]|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
Commission file number 1-10308
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CUC International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-0918165
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
707 Summer Street, Stamford, Connecticut 06901
- -------------------------------------------------------------------- ------------------------------------Delaware 06-0918165
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(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification no.)
707 Summer Street, Stamford, Connecticut 06901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 324-9261
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 Par Value New York Stock Exchange
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Zero Coupon Convertible Debentures, $100 Face Amount New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X|X| No ____|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 1996,31, 1997, was $5,391,322,648.$8,877,880,125. All officers and directors
of the registrant have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the registrant. The number of shares of the
registrant's Common Stock outstanding, $.01 par value, as of March 29, 199631, 1997 was
190,460,240408,461,280 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with the registrant's annual shareholders' meeting to
be held June 5, 199611, 1997 ("Proxy Statement") are incorporated by reference into
Part III hereof.
TABLE OF CONTENTS
Item Description Page
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PART I
1 Business...............................................................................1
2 Properties.............................................................................8
3 Legal Proceedings......................................................................8
4 Submission of Matters to a Vote of Security Holders....................................8
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters................9
6 Selected Financial Data................................................................10
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................11
8 Financial Statements and Supplementary Data............................................16
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................35
PART III
10 Directors and Executive Officers of the Registrant.....................................36
11 Executive Compensation.................................................................36
12 Security Ownership of Certain Beneficial Owners and Management.........................36
13 Certain Relationships and Related Transactions.........................................36
PART IV
14 Exhibits, Financial Statement Schedules and Report on Form 8-K.........................37
Signatures.............................................................................40
Index to Exhibits......................................................................42
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I
1 Business..................................................................1
2 Properties................................................................9
3 Legal Proceedings.........................................................9
4 Submission of Matters to a Vote of Security Holders.......................9
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters.10
6 Selected Financial Data..................................................11
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................13
8 Financial Statements and Supplementary Data..............................19
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................51
PART III
10 Directors and Executive Officers of the Registrant.......................52
11 Executive Compensation...................................................52
12 Security Ownership of Certain Beneficial Owners and Management...........52
13 Certain Relationships and Related Transactions...........................52
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..........53
Signatures...............................................................57
Index to Exhibits........................................................60
PART I
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ITEM 1. BUSINESS
THE COMPANY - GENERAL
CUC International Inc. (the "Company") is a leading technology-driven,
membership-based consumer services company, providing consumersapproximately 66.3 million
members with access to a variety of goods and services. The Company currently has approximately 46.5 million members using its various services. The
Company operates in one business segment, providingprovides
these services as individual, wholesale or discount program memberships
("memberships") (see "-Types of Memberships"). These memberships include such
components as shopping, travel, auto, dining, home improvement, lifestyle,
vacation exchange, credit card and checking account enhancement packages,
financial products and discount programs. The Company also administers insurance
package programs which are generally combined with discount shopping and travel
for credit union members, distributes welcoming packages which provide new
homeowners with discounts for local merchants, and provides travelers with
value-added tax refunds (see "-Membership Services"). The Company believes it is
the leading provider of membership basedmembership-based consumer services of these types in the
United States (see "-Competition"). The Company's membership activities are
conducted principally through its Comp-U-Card division ("Comp-U-Card") and the
Company's wholly-owned subsidiaries, FISI*Madison Financial Corporation
("FISI"), Benefit Consultants, Inc. ("BCI"), Interval International Inc.
("Interval") and, Entertainment Publications, Inc. ("Entertainment") and SafeCard
Services, Inc. ("SafeCard") acquired as part of the Ideon Group, Inc. ("Ideon")
acquisitions.
The Company also offers consumer software in various multimedia forms through
its recent acquisitions. During fiscal 1997, the Company acquired Davidson &
Associates, Inc. ("Davidson"), Sierra On-Line, Inc. ("Sierra") and Knowledge
Adventure, Inc. ("KA"). Davidson, Sierra and KA develop, publish, manufacture
and distribute high-quality educational, entertainment and personal productivity
interactive multimedia products for home and school use. These products
incorporate characters, themes, sound, graphics, music and speech in ways that
are engaging to the user for multimedia PC's, including CD-ROM-based PC systems,
and selected emerging platforms. (see Item 8: "Financial Statements - Note L -
Business Segments").
The Company derives its revenues principally from membership fees. Membership
fees vary depending upon the particular membership program, and annual fees to
consumers generally range from $6 to $250 per year. Most of the Company's
memberships are for one-year renewable terms, and members are generally entitled
to unlimited use during the membership period of the service for which the
member hasmembers have subscribed. Members generally may cancel their membershipmemberships and
obtain a full refund at any point during the membership term.
The Company arranges with clientclients, such as financial institutions, retailers,
oil companies, credit unions, on-line networks, fundraisers and others, to
market certain membership services to such clients' individual account holders
and customers. Participating institutions generally receive commissions on
initial and renewal memberships, averaging twenty percent of the net membership
fees. The Company's contracts with these clients generally grant the Company the
right to continue providing membership services directly to such clients'
individual account holders even if the client terminates the contract, provided
that the client continues to receive its commission.
The Company solicits members for many of its programs by direct marketing and by
using a direct sales force calling on financial institutions, fund raising
charitable institutions and associations. Some of the Company's individual
memberships are available on-line to interactive computer users via major
on-line services and the Internet's World Wide Web (see"-Distribution
Channels"). For the fiscal year ended January 31, 1996,1997, approximately 442536
million solicitation pieces were mailed, followed-up by approximately 5970 million
telephone calls.
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Individual memberships represented 63%68%, 65%68% and 69%70% of consolidatedmembership revenues for
the fiscal years ended January 31, 1997, 1996 1995 and 1994,1995, respectively. Wholesale
memberships represented 14%13%, 13%12% and 14%11% of consolidatedmembership revenues for the fiscal
years ended January 31, 1997, 1996 1995 and 1994,1995, respectively. Discount program
memberships represented 23%19%, 22%20% and 17%19% of consolidatedmembership revenues for the fiscal
years ended January 31, 1997, 1996 1995 and 1994,1995, respectively. Membership revenue is
recorded net of anticipated cancellations (see Item 7: "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Membership
Information").
TYPES OF MEMBERSHIPSTypes of Memberships
The Company offers Shoppers Advantage(R), Travelers Advantage(R),
AutoVantage(R), Premier Dining(R)Dinner on Us Club(R), PrivacyGuard(R), Buyers Advantage(R),
Credit Card Guardian(R) and other membership services. These benefits are
offered as individual memberships, as components of wholesale membership
enhancement packages and insurance products, and as components of discount
program memberships. A brief description of the different types of memberships
are as follows:
Individual Memberships. The Company classifies memberships as individual
memberships if 1) the member pays directly for the services; 2) the Company pays
for the marketing costs to solicit the member and primarily markets these
services using direct marketing techniques; 3) the membership is sold at full
price; and 4) the initial fulfillment kit consists of a variety of membership
materials such as a membership card, information describing the service and
discount coupons applicable to the service. Examples of these memberships
include Shoppers Advantage(R), Travelers Advantage(R) and AutoVantage(R) and
insurance products, which are sold at prices generally between $10 and $250 per
year.
Wholesale Memberships. The Company classifies memberships as wholesale
memberships if 1) the Company does not pay for the marketing costs to solicit
the member; 2) the initial fulfillment kit consists of a variety of membership
materials such as a membership card and information describing the service; 3)
the memberships may be sold at full or discounted group prices; and 4) the
member or the sponsor pays for the membership. Examples of these memberships
include enhancement packages sold through banks and credit unions and insurance
products sold to credit unions, for which the Company acts as a third party
administrator. Fees for these memberships are generally between $6 and $50 per
year.
Discount Program Memberships. The Company classifies memberships as discount
program memberships if 1) the initial fulfillment materials consist of various
offers of local or national discounts; 2) the primary marketing method is
through either a direct sales force contacting primarily fundraising
institutions, a participating merchant or general advertising; and 3) the member
or a local merchant generally pays for the membership. Examples of these
memberships include the Entertainment(R) and Gold C(R) coupon book programs.
Fees to consumers for these memberships generally range from $10 to $50 per
year.
MEMBERSHIP SERVICESMembership Services
The various memberships may contain all or some of the features of the following
services:
Shopping. Shoppers Advantage(R) is a discount shopping program whereby the
Company, through Compu-U-Card Services, Inc., provides product price information
and home shopping services to its members. The Company's merchandise database
contains information on approximately 250,000 brand name products, including a
written description of the product, the manufacturer's suggested retail price,
the vendor's price, features and availability. All of these products may be
purchased through the Company's independent vendor network. Vendors include
manufacturers, distributors and retailers nationwide. Individual members are
entitled to an unlimited number of toll-free calls seven days a week to the
Company's shopping consultants, who access the merchandise database to obtain
the lowest available fully delivered cost from participating vendors for the
product requested and accept any orders that the member may place. The Company
informs the vendor providing the lowest price of the member's order and that
vendor then delivers the requested product directly to the member. The
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Company acts as a conduit between its members and the vendors; accordingly, it
does not maintain an inventory of products.
As part of its individual member Shoppers Advantage(R) program, the Company
distributes catalogs eight to twelve times per year to certain members. In
addition, the Company automatically extends the manufacturer's warranty on all
products purchased through the Shoppers Advantage(R) program and offers a low
price guarantee.
Travel. Travelers Advantage(R) is a discount travel service program whereby the
Company, through CUC Travel Services, Inc. ("CUC Travel") (a full-service travel
agency), obtains information on schedules and rates for major scheduled
airlines, hotel chains and car rental agencies from the American Airlines
Sabre(R) Reservation System. In addition, the Company maintains its own database
containing information on tours, cruises, travel packages and short-notice
travel arrangements. Members book their reservations through CUC Travel, which
earns commissions (ranging from 5%-25%) on all travel sales from the providers
of the travel services. Certain Travelers Advantage(R) members can earn cash
awards from the Company equal to a specified percentage (generally 5%) of the
price of travel arrangements purchased by the member through CUC Travel. Travel
members may book their reservations by making toll-free telephone calls seven
days a week, twenty-four hours a day to agents at CUC Travel. CUC Travel's
agents reserve the lowest air, hotel and car rental fares available for the
members' travel requests.
Auto. The Company's auto service, AutoVantage(R), offers members comprehensive
new car summaries and discountspreferred prices on new domestic and foreign cars
purchased through the Company's independent dealer network (which includes
approximately 2,000 dealers)3,000 dealer franchises); discounts on maintenance, tires and
parts at more than 2530 chains and more than 23,000 locations, including well
known chains such as Goodyear and Firestone; discounts on parts and labor at
participating AutoVantage(R) new car dealers across the country; and used car
valuations. AutoVantage Gold(R) offers members additional services including
road and tow emergency assistance 24 hours a day in the United States.
Dining. Premier Dining(R) and Dinner on Us Club(R) featurefeatures two-for-one dining offers at more than
19,000 restaurants in major metropolitan areas across the United States. The
Company also manages AAdvantage Dining, a programother dining programs which allows American AAdvantageallow members to earn
three milesadditional benefits for each dollar spent (pre-tip total) for dining at nearly 3,000 participating
restaurants in the United States.
Credit Card Guardian.Registration. The Company's Credit Card Guardian(R) service enables
consumers to register their credit and debit cards with the Company so that the
account numbers of these cards may be kept securely in one place. If the member
notifies the Company that any of these credit or debit cards are lost or stolen,
the Company will notify the issuers of these cards, arrange for them to be
replaced and reimburse the member for any amount for which the card issuer may
hold the member liable. During fiscal 1997, the Company acquired Ideon, which
through its principal subsidiary, SafeCard, offers a credit card registration
service, "Hot-Line". If a member notifies SafeCard of a loss or theft of his/her
credit cards, SafeCard retrieves (or, if cards have not been previously
registered, obtains) the necessary card registration information, and then
promptly notifies the credit card issuers of the loss, simultaneously requesting
replacement.
Buyers Advantage. The Buyers Advantage(R) service extends the manufacturer's
warranty on products purchased by the member. This service also rebates 20% of
repair costs and offers members price protection by refunding any difference
between the price the member paid for an item and its reduced price, should the
item be sold at a lower price within sixty days after purchase.
CompleteHome. The CompleteHome(R) service is designed to save members time and
money in maintaining and improving their homes. Members can order do-it-yourself
"How-To Guides" or call the service for a tradesperson referral. Over 10,000
tradespersons are available nationally through a toll-free phone line. Members
also receive discounts on a full range of home-related products and services.
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Health Services. The HealthSaver membership provides discounts ranging from 10%
to 60% off retail prices on prescription drugs, eyewear, eyecare, selected
health-related services and fitness equipment, including sporting goods. The
service also makes available to consumers health-related information through
various services, including Nurseline, which provides members with general
medical information explaining common medical conditions in simple language.
Members also receive a subscription to a leading health newsletter. Members
may also purchase prescription and over-the-counter drugs through the mail.
PrivacyGuard Service. The PrivacyGuard(R) service provides members with a
comprehensive and understandable means of monitoring key personal information.
The service offers a member access to information in four key areas: credit
history, driving records maintained by state motor vehicle authorities, Social
Security records and medical files maintained by third parties. This information
is designed to assist members in updating and correcting information concerning
themselves and in obtaining mortgages or loans, applying for insurance and
planning for retirement.
Vacation Exchange Service. The Company, primarily through Interval, provides its
members with the ability to exchange their timeshare vacation weeks with those
of other members. Members receive an annual catalog detailing all properties
available for exchange, as well as periodic communications and may use the
Company's travel services.
Lifestyle Clubs. In September 1995, the Company acquiredThe Company's North American Outdoor Group, Inc. subsidiary
("NAOG"). NAOG owns and operates the North American Hunting Club(R), the North
American Fishing Club(R) and the Handyman Club of America(R)., among others.
Members of these clubs receive fulfillment kits, discounts on related goods and
services, magazines and other benefits.
Enhancement Package Service. The Company, primarily through FISI, sells
enhancement package memberships for checking account holders. FISI's financial
institution clients, with whom FISI has entered into written contracts, select a
customized package of the Company's products and services. Each client then
usually adds its own services (such as unlimited check writing privileges,
personalized checks, cashiers' or travelers' checks without issue charge, or
discounts on safe deposit box charges or installment loan interest rates). With
the Company's marketing and promotional assistance, the financial institution
then offers the complete package of account enhancements to its checking account
holders as a special program for a monthly fee.
Most of the Company's financial institution clients choose a standard
enhancement package, which generally includes $10,000 of accidental death
insurance, travel discounts and a nationwide check cashing service. Others may
choose the Company's shopping and credit card registration services, a financial
newsletter or pharmacy, eyewear or entertainment discounts as enhancements. The
accidental death coverage is underwritten under group insurance policies with
independent insurers. These insurers, including Hartford Life Insurance Company,
AMEX Life Assurance Company and Continental Casualty Company, a CNA insurance
company, have agreed to return to the Company, as a commission, the excess, if
any, of the total premiums paid during each year over the sum of the claims paid
or reserved plus a specified percentage of the total premiums. The Company
continuously seeks to develop new enhancement features which may be added to any
package at an additional cost to the financial institution.
The Company generally charges a financial institution client an initial fee to
implement this program and monthly fees thereafter based on the number of member
accounts participating in that financial institution's program. The Company's
enhancement packages are designed to enable a financial institution to generate
additional fee income, because the institution should be able to charge
participating accounts more than the combined costs of the services it provides
and the payments it makes to the Company.
The Company, primarily through National Card Control Inc. ("NCCI"), a
wholly-owned subsidiary, also sells enhancement package services to credit card
issuers who make these services available to their credit card holders. NCCI's
credit card issuer clients also select a customized package of the Company's
products and services. These enhancements include many of those offered by FISI
to the checking
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account customers of its financial institution clients, such as the Company's
shopping, travel and credit card registration services.
Like FISI, NCCI generally charges its credit card issuer clients an initial fee
to implement the program and monthly fees thereafter, based on the number of
member accounts participating in that institution's program.
Financial Products. Essex Corporation ("Essex"), a subsidiary of the Company, is
a third-party marketer of financial product memberships for banks, primarily
marketing annuities through financial institutions. Essex generally markets
annuities issued primarily by insurance companies or their affiliates, mutual
funds issued by mutual fund companies or their affiliates, and proprietary
mutual funds of banks. Essex's contracts with the insurance companies whose
financial product memberships it distributes generally entitle Essex to a
commission of slightly less than 1% on the premiums generated through Essex's
sale of annuities for these insurance companies.
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Wright Express Corporation ("WEX"), a wholly-owned subsidiary of the Company
acquired as part of the Ideon acquisition, is a provider of information
processing, management and financial services to petroleum companies and
transportation fleets in the United States. The Wright Express Universal Fleet
Card is the nation's most widely accepted electronic fleet fueling credit card
and is accepted at over 100,000 fueling locations.
Discount Program Memberships. The Company, primarily through its wholly-owned
subsidiary, Entertainment, offers discount program membershipmemberships in specific
markets throughout North America and certain international markets and enhances
other of the Company's individual and wholesale memberships. The Company
believes it is the largest marketer of discount program memberships of this type
in the United States.
The Company solicits restaurants, hotels, motels, theaters, retailers and other
businesses which agree to offer services and/or merchandise at discount prices
(primarily on a two-entrees-for-the-price-of-one or 50% discount basis). The
Company sells discount coupon memberships, under its Entertainment(R), Gold C(R)
and other trademarks, typically containing coupons for hundreds of discount
offers from participating establishments. Targeting middle to upper income
consumers, Entertainment(R) coupon books also contain selected discount travel
offers, including offers for hotels, restaurants and tourist attractions. More
than 100,000 merchants participate in these programs. Entertainment has used
this national base of merchants to develop other products, most notably,
customized memberships. Membership books customized for major corporations
typically contain portions of Entertainment(R) books, along with other discount
offers.
Entertainment(R) coupon book memberships are distributed annually by geographic
area. Members are solicited through nonprofit organizations, corporations and,
to a lesser extent, through retailers and directly from the public. Customized
books are distributed primarily by major corporations as premiums and incentives
for their employees. The coupon books are generally provided to nonprofit
organizations and corporations on a consignment basis.
While prices of local coupon memberships vary, the customary price for
Entertainment(R) and Gold C(R) coupon book memberships ranges between $10 and
$50. Customized book memberships are generally sold at significantly lower
prices. In fiscal 1996, 1471997, 160 Entertainment(R) editions (1996(1997 Edition) were
published in North America.
Sally Foster, Gift Wrap, LP,Inc., a subsidiary of the Company, provides fundraising
institutions with seasonal products, primarily through public and private
elementary schools. The Company uses its Gold C(R) sales force to sell these
products, often combining the sale of gift wrap with other membership services.
In February 1995, the Company acquired Welcome Wagon International, Inc. ("Welcome Wagon"), a 67-year old organization whichwholly-owned subsidiary
of the Company, has over 2,0002,500 field representatives who visit households and
campuses each year to provide consumers with discounts for local merchants. In June 1995, the Company acquiredThe
Getko Group Inc. ("Getko"). Getko, a wholly-owned subsidiary of the Company,
distributes complimentary welcoming packages which provide new homeowners
throughout
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the United States and Canada with discounts for local merchants. The Company
plans to expand Welcome Wagon's and Getko's market penetration and the number of
their membership offerings to include some of the Company's programs.
In January 1996, the Company acquired Advance Ross CorporationThrough a subsidiary, Europe Tax-Free Shopping ("Advance Ross"ETS"), a processor of value-addedvalued-added tax ("VAT")
refunds are facilitated to travelers in over 20 European countries. Advance Ross, through its subsidiary, Europe Tax-free Shopping
("ETS")ETS has
affiliations with over 90,000100,000 retailers as well as a presence in most major European
airports. The Company plans to expand the services ETS provides to travelers to
include Entertainment(R) coupon book memberships and Travelers Advantage(R).
Insurance Products. The Company, through BCI, serves as a third party
administrator for marketing accidental death insurance throughout the country to
the customers of BCI's financial institution clients. This accidental death
insurance is often combined with other Company membership services to enhance
their value. These products are generally marketed through direct mail
solicitations, which generally offer $1,000 of accidental death insurance at no
cost to the member and the opportunity to choose additional coverage of up to
$250,000. The annual membership fee generally ranges from $10 to $250.
BCI's insurance products and other services are offered through credit unions to
their account holders and to the account holders of FISI's and Comp-U-Card's
financial institution clients. BCI also markets the Company's shopping, travel,
automobile and discount coupon program membership services to its clients.
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DISTRIBUTION CHANNELSDistribution Channels
MEMBERSHIPS:
The Company markets its individual, wholesale, and discount program memberships
through a variety of distribution channels. The consumer is ultimately reached
in the following ways: 1) at financial institutions or other associations
through direct marketing; 2) at financial institutions or other associations
through a direct sales force, participating merchant or general advertising; and
3) through fundraisers such as schools and charitable institutions. Some of the
Company's individual memberships, such as shopping, travel and auto services,
are available on-line to interactive computer users via on-line services and the
Internet's World Wide Web. These users are solicited primarily through direct
mail, inserts in newly-purchased computer equipment containers and interactive
communications networks, such as the CompuServe Information Service, America
Online and Prodigy. The Company believes that its interactive users account for
less than 1% of its total members. The Company is currently working with a range
of industry leaders developing interactive technologies. Strategic alliances
have been formed with major phone companies cable companies
and on-line services.
SOFTWARE:
The Company has participated in the launchCompany's recent acquisitions of interactive
services including working with Time Warner in Orlando, Florida to market
interactive TV home-shopping services.
RECENT DEVELOPMENTS
During February 1996, the Company entered into two separate agreements to
acquire Davidson & Associates, Inc. and Sierra On-Line, Inc., two
industry-leading publishershave broadened the
scope of educationofferings to include consumer software and entertainment software.CD's, which have
demonstrated appeal to Internet shoppers. These proposed acquisitions should open major new opportunities in those consumer
markets (see Item 8: "Financial Statementsproducts are offered through a
variety of distribution channels, including specialty retailers, mass
merchandisers, discounters and Supplementary Data - Note I -
Subsequent Events").
During April 1996, the Company entered into an agreement to acquire Ideon Group,
Inc. ("Ideon"), whose SafeCard Services unit is a leading provider of credit
card enhancement services across the United States. The acquisition of Ideon
should enhance the Company's product offerings as well as complement the
Company's client and membership bases (see Item 8: "Financial Statements and
Supplementary Data - Note J - Event (Unaudited) Subsequent to Date of
Independent Auditors' Report").schools.
REGULATION
The Company markets its products and services through a number of distribution
channels including telemarketing, direct mail and on-line. These channels are
regulated on the state and federal level and the Company believes that these
activities will increasingly be subject to such regulation. Such regulation may
limit the Company's ability to solicit new members or to offer one or more
products and services to existing members and may materially affect the
Company's business and revenues.
Certain of the Company's products and services (such as Buyers Advantage(R),
certain insurance products and the Company's vacation exchange services) are
also subject to state and local regulations. The Company believes that such
regulations do not have a material impact on its business or revenues.
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INTERNATIONAL
The Company has exclusive licensing agreements covering the use of its
merchandising systems in Japan, Canada and Australia, under which licensees paid
initial license fees and agree to pay royalties to the Company on membership
fees, access fees and merchandise service fees paid to them. In March 1995, the
Company acquired the parent of its European licensee, CUC Europe Limited,
pursuant to an option granted to the Company in fiscal 1993. Royalties to the
Company from these licenses and the Company's European license were less than 1% of the Company's revenues and
profits in each of the fiscal years ended January 31, 1997, 1996 1995 and 1994.
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In March 1995, the Company acquired1995.
The Company's subsidiary, Credit Card Sentinel (U.K.) Limited ("CCS").
CCS, is a
leading provider of credit card enhancement services generally marketed through
European financial institutions, with members throughout the United Kingdom and
Sweden.
In fiscal 1996,1997, in addition to Canadian coupon book memberships,
Entertainment(R) coupon book memberships were distributed in six European
markets and Australia. The Canadian coupon book memberships are published
independently by a Canadian subsidiary of Entertainment and the European
memberships are published by the Company's European subsidiaries. The Australian
coupon book memberships are published by an Australian joint venture in which
Entertainment has a controlling interest. United States and Canadian memberships
are also made available to foreign travelers. With publication of these overseas
memberships, the Company has created additional custom-designed programs for
international use.
Interval's primary international operating facility is located in London.
Interval's overseas operations also include field offices and affiliations with
resorts in many countries.
ETS currently provides VAT refunds in over 20 European countries at refund
points at most international airports, ferry terminals and border crossings in
those countries. ETS' primary international operating facility is located in
Sweden.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because the Company operates in a mix of membership
services and numerous countries, management believes currency exposures are
fairly well diversified (see Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources;
Inflation; Seasonality").
SEASONAL NATURE OF BUSINESS
Except principally for the sale of discount coupon program memberships, the
Company's membership business is not seasonal. Publication of Entertainment(R)
and Gold C Savings Spree(R) books is generally completed in October of each year
with significant member solicitations beginning soon thereafter. Most cash
receipts from these coupon book memberships are received in the fourth quarter
and, to a lesser extent, in the first and third quarters of each fiscal year.
For financial statement purposes, the Company recognizes these membership fees
over the service period. The Company's software segment has seasonal elements.
Revenues are typically highest during the third and fourth quarters and lowest
during the first and second quarters. This seasonal pattern is due primarily to
the increased demand for the Company's products during the holiday season (see
Item 7: "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources; Inflation; Seasonality").
-7-
COMPETITION
Individual Memberships. The Company believes that there are competitors which
offer membership programs similar to the Company's and some of these entities,
which include large retailers, travel agencies, insurance companies and
financial service institutions, have financial resources, product availability,
technological capabilities or customer bases substantially greater than those of
the Company. To date, the Company has been able to compete effectively with such
competitors. However, there can be no assurances that it will continue to be
able to do so. In addition, the Company competes with traditional methods of
merchandising that enjoy widespread consumer acceptance, such as catalog and
in-store retail shopping and shopping clubs (with respect to its discount
shopping service), and travel agents (with respect to its discount travel
service). The Company's systems are not protected by patent. In its vacation
exchange business, the Company believes there are various travel providers and
exchange companies with greater financial resources than itself.
Wholesale Memberships. Each of the Company's account enhancement membership
services competes with similar services offered by other companies, including
insurance companies. Many of the competitors are large and more established,
with far greater resources and financial capabilities than those of the Company.
Finally, in attempting to attract any relatively large financial institution as
-7-
a client, the Company also competes with that institution's in-house marketing
staff and the institution's possible perception that it could establish programs
with comparable features and customer appeal without paying for the services of
an outside provider.
Discount Program Memberships. The Company believes that there are a number of
competitors in most markets throughout North America which offer similar
discount program memberships. The majority of these competitors are relatively
small, with coupon books in only a few markets. To date, the Company has been
able to compete effectively in markets that include these competitors, primarily
on the basis of price and product performance. The Company does not anticipate
that these competitors will significantly affect the Company's ability to
expand.
Software. The entertainment and education software industry is competitive. The
Company competes primarily with other developers of multimedia PC entertainment
and home productivity software. Products in the market compete primarily on the
basis of subjective factors such as entertainment value and objective factors
such as price, graphics and sound quality. Large diversified entertainment,
cable and telecommunications companies, in addition to large software companies,
are increasing their focus on the interactive entertainment and education
software market, which will result in greater competition for the Company.
EMPLOYEES
As of March 29, 1996,31, 1997, the Company had approximately 11,00015,000 employees. None of
the Company's employees are represented by a labor union. The Company has never
experienced a strike or work stoppage, and believes its relations with its
employees are good.
OTHER
As certain of the statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995), they involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.-8-
ITEM 2.
PROPERTIES
The Company's principal executive offices are located in Stamford, Connecticut.
The Company also owns or leases office space in Brentwood, Tennessee; San
Carlos, California; Spartanburg, South Carolina; Troy, Michigan; Cheyenne, Wyoming; Torrance, California;
Seattle, Washington; Miami, Florida; and Trumbull, Connecticut, as well as
several smaller locations throughout the world. In addition, the Company owns
and leases operation centers in several other states.
Management expects that, in the normal course of business, most leases will be
renewed or replaced by other leases upon expiration. The Company believes that
its properties and those of its subsidiaries and divisions are suitable to their
respective businesses and have productive capacities adequate to the needs of
such businesses.
ITEM 3.
LEGAL PROCEEDINGS
None.Ideon and certain of its subsidiaries are defending or prosecuting fifteen
complex lawsuits, twelve of which involve the former Chairman of the Board and
Executive Management Consultant to SafeCard (see Item 8: "Financial
Statements-Note B-Mergers and Acquisitions and Note I-Commitments and
Contingencies").
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
January 31, 1996.
-8-1997.
-9-
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is traded
on the New York Stock Exchange ("NYSE") under the symbol CU. The following table
sets forth for the periods indicated the high and low closing sale prices per
share as reported on the NYSE.
High Low
---------------------------------------------
Fiscal Year Ended January 31, 1997
First Quarter 26 1/8 18 5/8
Second Quarter 26 1/4 21 1/4
Third Quarter 27 3/8 21 7/8
Fourth Quarter 26 7/8 22 1/2
Fiscal Year Ended January 31, 1996
First Quarter 2718 1/8 23 1/15 3/8
Second Quarter 31 1/20 3/4 16 3/8
Third Quarter 24 1/2
Third Quarter 36 3/8 294 19 7/8
Fourth Quarter 38 30
Fiscal Year Ended January 31, 1995
First Quarter 21 7/8 18
Second Quarter 2025 3/8 17 1/8
Third Quarter 23 1/8 20 3/8
Fourth Quarter 24 1/8 19 1/8
The stock prices have been adjusted to give retroactive effect to the
three-for-two stock split effective June 30, 1995October 21, 1996 for shareholders of record
on June 19, 1995.October 7, 1996. The closing sale price for the Common Stock on March 29, 199631,
1997 was $29$22 1/4,2, with approximately 6,8548,981 shareholders of record as of that
date.
The Company has not paid any dividends with respect to the Common Stock since
inception, other than a special dividend of cash and convertible subordinated
debentures paid in connection with a recapitalization of the Company effected in
fiscal 1990 (the "Recapitalization").
The AmendedCHANGES IN SECURITIES
During the fiscal quarter ended January 31, 1997, the Company issued the
following equity securities that were not registered under the Securities Act of
1933 (the "Securities Act"):
On January 6, 1997, the Company issued 2,176,476 shares of Common Stock to
Pierre Durand, Michael Low and Restated Credit Agreement
entered intoMartin Stoller in connection with the
acquisition by the Company and General Electric Capital Corporationof all of the outstanding capital stock of
Plextel Telecommunications, Inc. ("GECC"),
as Agents, as of June 30, 1994 (the "GECC Credit Agreement"), was terminated
effective March 19, 1996 (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources; Inflation;
Seasonality"Plextel"). However,This issuance was made
pursuant to the GECC Credit Agreement contained restrictions that
precludedexemption from registration provided by Section 4(2) of the
payment of cash dividends on sharesSecurities Act, as this issuance of Common Stock.
-9-Stock did not involve a "public
offering" pursuant to the Securities Act given the limited number and scope
of persons to whom the securities were issued. The Company has filed a
Registration Statement with the Commission, which has been declared
effective by the Commission, with respect to the resale of the Common Stock
received from the Company in connection with this acquisition.
-10-
ITEM 6.
SELECTED FINANCIAL DATA
(In thousands, except for per common share data)
Year Ended January 31,
-------------------------------------------------------------------------------------------------------------------------------------------------------
1997 1996 (b) 1995 (e) 1994 1993
(f) 1992
-------------------------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data (a)
Total revenues $1,414,964 $1,182,896 $984,801 $800,971 $699,049$2,347,655 $1,935,232 $1,554,611 $1,278,664 $1,043,311
Income from continuing operations
before income taxes 266,343 (c) 201,785 153,258 101,402 60,536 (g)276,241(b) 235,312(c) 256,931(e) 198,319 117,434
Income from continuing operations 163,374 (c) 124,566 94,151 63,667 33,901 (g)164,099(b) 144,975(c) 162,057(e) 124,705 80,239
Income per common share from
continuing operations (d) $ .84(c).41(b) $ .66.37(c) $ .51.43(e) $ .38.34 $ .21 (g)
====================================================================================.24
Cash dividends per common share (d,h) $ .01 $ .01 $ .01 $ .01 $ .01
Weighted average number of
common and dilutive common
equivalent shares
outstanding (d) 194,666 189,219 183,113 167,908 163,690
====================================================================================405,073 392,208 379,263 365,915 340,712
Balance Sheet Data (a)
Total assets $1,141,306 $ 878,637 $708,018 $569,077 $378,339(f) $2,473,372 $2,068,196 $1,772,122 $1,199,805 $1,032,269
Long-term debt (h) 5,451 16,965 23,601 29,855 16,330obligations (g) 7,018 6,481 22,872 24,235 30,091
Zero coupon convertible notes -- 14,410 15,046 22,176 37,295
69,228
Stockholders'Convertible debt 23,487 23,389 34,634 -- --
Shareholders' equity (i) 727,212 480,163 312,047 167,381 19,6041,255,090 1,002,523(i) 826,083 558,181 389,461
Working capital 617,862 424,437 281,384 134,230 99,887(f) 948,699 759,271 523,996 298,230 147,475
(a) Includes Getko Group Inc. ("Getko"), North American Outdoor Group, Inc.
("NAOG")acquisitions accounted for in accordance with the
pooling-of-interests method of accounting and Advance Ross Corporation ("Advance Ross")the purchase method of
accounting (see Note B to the Consolidated Financial Statements).
(b) During fiscal 1996,Includes provisions for costs incurred principally in connection with the
Company acquired Welcome Wagon International, Inc.
("Welcome Wagon"), CUC Europe Limitedacquisitions of Davidson, Sierra and Credit Card Sentinel (U.K.Ideon. The charges aggregated $179.9
million ($118.7 million or $.29 per common share after-tax effect). Such
costs in connection with the Company's acquisitions of Davidson and Sierra
are non-recurring and are comprised primarily of transaction costs, other
professional fees and integration costs. Such costs associated with the
Company's acquisition of Ideon (the "Ideon Merger") Limitedare non-recurring and
include integration and transaction costs as well as a provision relating
to certain litigation matters (see NoteNotes B and I to the Consolidated
Financial Statements).
(c) Includes provision for costs incurred in connection withrelated to the acquisitionabandonment of Advance Ross.certain Ideon
development efforts and the restructuring of its SafeCard division and its
corporate infrastructure. The chargecharges aggregated $5.2$97.0 million ($4.262.1
million or $.02$.16 per common share after-tax effect).
(d) Adjusted to give retroactive effect to the three-for-two stock split
effective June 30, 1995October 21, 1996 for shareholders of record on June 19, 1995.October 7, 1996.
(e) During fiscal 1995, the Company acquired Essex Corporation and subsidiaries
("Essex") (see Note B to the Consolidated Financial Statements).
(f) During fiscal 1993, the Company acquired Leaguestar plc and Sally Foster
Gift Wrap, LP ("Sally Foster").
(g) Includes provision for costs incurred in connection with the integrationnet gain of the operations of the Company and Entertainment Publishing Corp. (acquired
during fiscal 1992 in a transaction accounted for in accordance with the
pooling-of-interests method) and costs of professional fees and other
expenses related to the merger with Entertainment Publishing Corp. The
charge aggregated $20.7$9.8 million ($156.2 million or $.09$.02 per common share
after-tax effect). Also includes a gain from related to the sale of The ImagiNation Network, Inc.
offset by costs related to Ideon products abandoned and restructuring.
-11-
(f) All periods presented reflect the Company's reclassifications of deferred
membership acquisition costs (previously classified as an unconsolidated
affiliate of Advance Ross. The gain aggregated $11.7 million ($7 million or
$.04 per common share after-tax effect).
-10-
(h)offset to
deferred membership income) and membership solicitations in process
(previously classified as a current asset) to non-current assets.
(g) Includes current portion of long-term debt of $2.0 million, $1.4 million,
$9$9.0 million, $6.3 million, $3.4 million and $1.2$3.4 million at January 31, 1997, 1996,
1995, 1994 1993 and 1992,1993, respectively. Excludes $31.4 million, $15.4 million,
$11.8 million, $5.5 million $23.2 million and $26.7$23.2 million of amounts due under
revolving credit facilities at January 31, 1997, 1996, 1995, 1994 1993 and 1992,1993,
respectively, and $6$6.0 million due at January 31, 1993 under a note payable
issued in connection with the acquisition of Sally Foster.
(i)Foster Gift Wrap, LP.
(h) Represents cash dividends paid to Ideon common shareholders. No Common
Stock cash dividends have been paid or declared during the five years ended
January 31, 1996.1997. However, an insignificant amount of cash dividends werewas
paid in respect of the NAOG common stock for the fiscal years ended January
31, 1994 1993 and 1992.1993.
(i) Effective January 1, 1995, Ideon changed its fiscal year end from October
31 to December 31 (the "Ideon Transition Period"). The Ideon Transition
Period has been excluded from the accompanying consolidated statements of
income. Ideon's revenues and net loss for the Ideon Transition Period were
$34.7 million and $(49.9) million, respectively. The net loss for the Ideon
Transition Period was principally the result of a $65.5 million one-time,
non-cash, pre-tax charge recorded in connection with a change in
amortization periods for deferred membership acquisition costs.
-12-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED JANUARYYear Ended January 31, 1996 VS. YEAR ENDED JANUARY1997 vs. Year Ended January 31, 19951996
The Company's overall membership base continues to grow at a rapid rate (from
33.959.7 million members at January 31, 19951996 to 46.566.3 million members at January 31,
1996)1997), which is the largest contributing factor to the 20% increase in
membership revenues (from $1,182.9$1,643.2 million in fiscal 19951996 to $1,415$1,972.4 million in
fiscal 1996)1997). While the overall membership base increased by 12.6 million members, or 37%,15% (before giving
effect to Ideon acquired members) during the year, (of which approximately 8 million members came from acquisitions
completed during the year (members resulting from acquisitions being "Acquired
Members")), the average annual fee
charged for the Company's membership services increased by 3.5%approximately 4%. The
Company divides its memberships into three categories: individual, wholesale and
discount program memberships. Individual memberships consist of members that pay
directly for the services and the Company pays for the marketing costs to
solicit the membermembers primarily using direct marketing techniques. Wholesale
memberships include members that pay directly for the services to their sponsor
and the Company does not pay for the marketing costs to solicit the members.
Discount program memberships are generally marketed through a direct sales
force, participating merchantmerchants or general advertising and the related fees are
either paid directly by the member or the local retailer. All of these
categories share various aspects of the Company's marketing and operating
resources.
In the 1997 fiscal year, individual (before giving effect to Ideon acquired
members), wholesale and discount program memberships grew by 14%, 23% and 12%,
respectively. Wholesale memberships have grown in part due to the success of the
Company's international business in Europe. For the year ended January 31, 1997,
individual, wholesale and discount program memberships represented 68%, 13% and
19% of membership revenues, respectively. The Company maintains a flexible
marketing plan so that it is not dependent on any one service for the future
growth of the total membership base. The Company completed a number of
acquisitions accounted for under the purchase method of accounting during fiscal
1997. The total revenues contributed by these acquisitions are not material to
the Company's total reported revenues (see Note B to the Consolidated Financial
Statements).
Software revenues increased 28% to $375.2 million in fiscal 1997 from $292.0
million in fiscal 1996. Distribution revenue, which consists principally of
third-party software and typically has low operating margins, was down from
$64.8 million in fiscal 1996 to $46.9 million in fiscal 1997. The Company's
software operations continue to grow by focusing on selling titles through
retailers. Excluding distribution revenue, core software revenue grew by 44%.
Contributing to the software revenue growth in fiscal 1997 is the availability
of a larger number of titles as well as the significant increase in the
installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, operating
income before interest, merger, integration, restructuring and litigation
charges associated with business combinations, costs related to products
abandoned and restructuring, gain on sale of and equity in loss from The
ImagiNation Network, Inc. and income taxes ("EBIT") increased from $322.7
million to $446.6 million and EBIT margins improved from 16.7% to 19.0%.
-13-
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $401
million, $376 million and $354 million for the fiscal years ended January 31,
1997, 1996 and 1995, respectively. This represents 17%, 19% and 21%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations has
increased due to the increased level of marketing efforts, but has decreased as
a percentage of the total number of members.
Operating costs increased 18% (from $593.5 million to $701.3 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing and participant insurance premiums (the cost of
obtaining insurance coverage for members). Historically, the Company has seen a
direct correlation between providing a high level of service to its members and
improved retention. The major components of the Company's software operating
costs are material costs, manufacturing labor and overhead, royalties paid to
developers and affiliated label publishers and research and development costs
related to designing, developing and testing new software products. The increase
in overall operating costs is due principally to the variable nature of many of
these costs and, therefore, the additional costs incurred to support the growth
in the membership base and software sales.
Marketing costs remained constant as a percentage of revenues at 38%. This is
primarily due to maintained per member acquisition costs and an increase in
renewing members. Membership acquisition costs incurred increased 5% (from
$605.1 million to $638.2 million) as a result of the increased marketing effort
which resulted in an increased number of new members acquired. Marketing costs
include the amortization of membership acquisition costs and other marketing
costs, which primarily consist of membership communications and sales expenses.
Amortization of membership acquisition costs increased by 15% (from $556.5
million to $641.3 million). Other marketing costs increased by 36% (from $180.9
million to $246.6 million). This increase resulted primarily from the costs of
servicing a larger membership base and expenses incurred when selling and
marketing a larger number of software titles. The marketing functions for the
Company's membership services are combined for its various services and,
accordingly, there are no significant changes in marketing costs by membership
service.
The Company routinely reviews all membership renewal rates and has not seen any
material change over the last year in the average renewal rate. Renewal rates
are calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenues, from 15%
to 13%. This is a result of the Company's ongoing focus on controlling overhead.
Interest income, net, decreased from $9.7 million to $9.5 million due to cash
being used to fund acquisitions.
Merger costs for the year ended January 31, 1997 are non-recurring and are
comprised primarily of transaction and integration costs principally associated
with the mergers of the Company with Davidson, Sierra and Ideon as well as a
provision relating to certain outstanding Ideon litigation matters (see Notes B
and I to the Consolidated Financial Statements).
-14-
Year Ended January 31, 1996 vs. Year Ended January 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
46.9 million members at January 31, 1995 to 59.7 million members at January 31,
1996), which is the largest contributing factor to the 21% increase in
membership revenues (from $1,363.6 million in fiscal 1995 to $1,643.2 million in
fiscal 1996). While the overall membership base increased by 12.8 million
members, or 27%, during the year (of which approximately 8 million members came
from acquisitions completed during the year (members resulting from acquisitions
being "Acquired Members")), the average annual fee charged for the Company's
membership services increased by 3%. The Company divides its memberships into
three categories: individual, wholesale and discount program memberships.
Individual memberships consist of members that pay directly for the services and
the Company pays for the marketing costs to solicit the members primarily using
direct marketing techniques. Wholesale memberships include members that pay
directly for the services to their sponsor and the Company does not pay for the
marketing costs to solicit the members. Discount program memberships are
generally marketed through a direct sales force, participating merchants or
general advertising and the related fees are either paid directly by the member
or the local retailer. All of these categories share various aspects of the
Company's marketing and operating resources.
In the 1996 fiscal year, individual (before giving effect to Ideon acquired
members), wholesale and discount program memberships grew by 14%, 19% and 11%,
respectively, in addition to the increase due to Acquired Members. For the year
ended January 31, 1996, individual, wholesale and discount program memberships
represented 63%68%, 14%12% and 23%20% of membership revenues, respectively. Discount
program memberships have incurred the largest increase from Acquired Members.
Welcome Wagon International, Inc., Getko Group Inc. and Advance Ross
Corporation, all acquired in fiscal 1996, are classified in this membership
category as their businesses provide local discounts to consumers. The Company
maintains a flexible marketing plan so that it is not dependent on any one
service for the future growth of the total membership base. The Company
completed a number of acquisitions accounted for under the purchase method of
accounting during fiscal 1996. The total revenues contributed by these
acquisitions are not material to the Company's total reported revenues (see Note
B to the Consolidated Financial Statements).
Software revenues increased 53% to $292.0 million in fiscal 1996 from $191.1
million in fiscal 1995. Contributing to the strong software growth in fiscal
1996 was the release of 63 new titles and an additional 18 titles which were
acquired, as compared to 34 new products released in fiscal 1995. Also
contributing to the software revenue growth is the significant increase in the
installed base of CD-ROM personal computers as well as increases in affiliated
label and distribution revenues.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, operating income
before interest, amortization of restricted stock compensation, merger costs and
income taxes ("EBIT")EBIT
increased from $202.4$239.1 million to $270.7$322.7 million and EBIT margins improved from
17.1%15.4% to 19.1%16.7%.
-11-
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate.rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $335$376
million, $315$354 million and $285$319 million respectively, for the fiscal years ended January 31,
1996, 1995 and 1994.1994, respectively. This represents 19%, 21% and 22%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations has
increased due to the increased level of marketing efforts, but has decreased as
a percentage of the total number of members.
-15-
Operating costs increased 18%25% (from $320.8$474.1 million to $379.9$593.5 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing and participant insurance premiums (the cost of
obtaining insurance coverage for members). In addition,Historically, the Company has seen a
direct correlation between providing a high level of service to its members and
improved retention. The major components of the Company's software operating
costs include travel
cash awards. Travel members are entitledmaterial costs, manufacturing labor and overhead, royalties paid to
receive cash awards based on travel
booked with the Company. For the year ended January 31, 1996, these awards
represent less than 5% of total operating costs.developers and affiliated label publishers and research and development costs
related to designing, developing and testing new software products. The increase
in overall operating costs is due principally to the variable nature of many of
these costs and, therefore, the additional costs incurred to support the growth
in the membership base. Historically, the Company has seen a direct correlation between
providing a high level of service to its membersbase and improved retention.software sales.
Marketing costs decreased as a percentage of revenues, from 41%40% to 39%38%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
19% (from $388.4$508.8 million to $464$605.1 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 16%19%
(from $361$467.0 million to $417.1$556.5 million). Other marketing costs increased by 18%20%
(from $118.6$151.3 million to $139.8$180.9 million). This increase resulted primarily from
the costs of servicing a larger membership base.base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's consumermembership services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by membership service.
The Company routinely reviews all membership renewal rates and has not seen any
material change over the last year in the average renewal rate. Renewal rates
are calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs remained constantincreased as a percentage of revenue
(15%)revenues, from 14%
to 15%. This is the result of the Company's ongoing abilityprincipally due to control overhead.acquisitions completed during fiscal 1996.
Interest (income) expense,income, net, decreasedincreased from $.6$7.9 million to $(.9)$9.7 million due to the
reduced level of amortization associated with the Company's restricted stock and
zero coupon convertible notes and the net interest income from the increased
level of cash generated by the Company for investment.
YEAR ENDED JANUARY 31, 1995 VS. YEAR ENDED JANUARY 31, 1994
The Company's overall membership base continuesIncluded in costs related to grow at a rapid rate (from
30.9 million members at January 31, 1994 to 33.9 million members at January 31,
1995), which is the largest contributing factor to the 20% increase in revenues
(from $984.8 million in fiscal 1994 to $1,182.9 million in fiscal 1995). While
the overall membership base increased by 3 million members before adjustmentproducts abandoned and restructuring for
Acquired Members resulting from the fiscal 1996 pooling-of-interests
transactions, or 10%, during the past year, the average annual fee charged for
the Company's membership services increased by 3%. The Company divides its
memberships into three categories: individual, wholesale and discount program
memberships. All of these categories share various aspects of the Company's
marketing and operating resources. In the 1995 fiscal year, individual,
wholesale and discount program memberships grew by 11%, 6% and 11%,
respectively. For the year
ended January 31, 1995, individual, wholesale1996, are special charges totaling $43.8 million, net of
recoveries, related to the abandonment of certain new product developmental
efforts and discount program memberships represented 65%, 13%the related impairment of certain assets and 22% of revenues,
respectively. The Company maintains a flexible marketing plan so that it is not
dependent on any one service for the future growthrestructuring of
the total membership base.SafeCard division of Ideon and the Ideon corporate infrastructure. The
Company completed an acquisitionoriginal charge of Essex, a privately
-12-
owned third-party marketer$45.0 million was composed of financial products for banks,accrued liabilities of $36.2
million and certain
other entities, during fiscal 1995. The total revenues contributed by this
acquisition are not material to the Company's total reported revenues. This
acquisition was accounted for in accordance with the purchase methodasset impairments of accounting and, accordingly, the results of operations have been$8.8 million. Also included in the
consolidated results of operations from the date of acquisition (see Note Bcosts related to
the Consolidated Financial Statements).
As the Company's services continue to mature, a greater percentage of the total
individual membership base is in its renewal years. This results in increased
profit margins for the Company due to the significant decrease in certainproducts abandoned and restructuring are marketing and operational costs
incurred on renewing members. As a result, EBIT increased from
$160.3 million to $202.4 million and EBIT margins improved from 16.3% to 17.1%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $315
million, $285 million and $270 million, respectively, for the fiscal years ended
January 31, 1995, 1994 and 1993. This represents approximately 21%, 22% and 25%Ideon products abandoned of the gross revenues accrued for all services. The Company records its deferred
revenue net of estimated cancellations which are anticipated in the Company's
marketing programs. The number of cancellations has increased due to the
increased level of marketing efforts, but has decreased as a percentage of the
total number of members.
Operating costs increased 20% (from $267.8 million to $320.8 million). The major
components of the Company's operating costs continue to be personnel, telephone,
computer processing, participant insurance premiums (the cost of obtaining
insurance coverage for members) and travel cash awards. Travel members are
entitled to receive cash awards based on travel booked with the Company. For the
year ended January 31, 1995, these awards represent less than 5% of total
operating costs. The increase in overall operating costs is due principally to
the variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base. Historically, the Company
has seen a direct correlation between providing a high level of service to its
members and improved retention.
Marketing costs increased as a percentage of revenue, from 40% to 41%. This
increase is primarily due to a higher volume of membership communications
distributed throughout the year as well as servicing a larger membership base.$53.2 million.
Membership acquisition costs incurred increased 13% (from $344 million to $388.4
million). Marketing costs include the amortization of membership acquisition
costs and other marketing costs, which primarily consist of membership
communications and sales expenses. Amortization of membership acquisition costs
increased by 15% (from $314.2 million to $361 million). Other marketing costs
increased by 48% (from $80.3 million to $118.6 million). This increase resulted
primarily from the costs of servicing a larger membership base as well as costs
to establish the American Airlines AAdvantage Dining program. The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by products.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Based on current
information, the Company does not anticipate that the average renewal rate will
change significantly. Renewal rates are calculated by dividing the total number
of renewing members not requesting a refund during their renewal year by the
total members up for renewal.
General and administrative costs decreased as a percentage of revenue, from 16%
to 15%. This is the result of the Company's ongoing ability to control overhead.
Interest (income) expense, net decreased from $7 million to $.6 million
primarily due to the reduction of the Company's average outstanding loan
balance.
-13-
MEMBERSHIP INFORMATIONInformation
The following chart sets forth the approximate number of members and net
additions for the last three fiscal years:years. All membership data has been restated
to reflect the acquisition of Ideon; however, it has not been restated to
reflect other Acquired Members:
Net New Member Additions
Year Ended Number of Members for the Period
--------------------------------------------------------------------------------------------------------------------------------------------
January 31, 1997 66,335,000 6,685,000
January 31, 1996 46,480,000 12,630,000*59,650,000 12,750,000*
January 31, 1995 33,850,000 3,000,000
January 31, 1994 30,850,000 3,250,00046,900,000 3,820,000
*Includes approximately 8 million Acquired Members.
-16-
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximatesapproximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Cancellations for memberships processed by the Company for the years ended
January 31, 1997, 1996 and 1995 and 1994 were $335$401 million, $315$376 million and $285$354
million, respectively. This cancellation data does not reflect cancellations
processed by certain of the Company's clients which report membership
information only on a net basis. Accordingly, the Company does not receive
actual numbers of gross additions and gross cancellations for certain types of
memberships. In calculating the number of members, the Company has deducted its
best estimate of cancellations which may occur during the trial membership
periods offered in its marketing programs. Typically, these periods range from
one to three months.
LIQUIDITY AND CAPITAL RESOURCES; INFLATION; SEASONALITYLiquidity and Capital Resources; Inflation; Seasonality
Funds for the Company's operations have been provided principally through cash
flowflows from operations and credit facilities, while acquisitions have also been
funded through the issuance of Common Stock. The Company terminated the GECC
Credit Agreementits previous
credit agreement, effective March 19, 1996, and entered into the New Credit
Agreement duringeffective March 26, 1996 as(as defined and described in Note DE to the
Consolidated Financial Statements.Statements). The New Credit Agreement provides for a $500
million revolving credit facility with a variety of different types of loans
available thereunder. At January 31, 1997, no borrowings under the New Credit
Agreement were outstanding. The New Credit Agreement contains certain customary
restrictive covenants including, without limitation, financial covenants and
restrictions on certain corporate transactions, and also contains various events
of default provisions including, without limitation, defaults arising from
certain changes in control of the Company.
In January 1997, Wright Express Corporation ("Wright Express"), a wholly-owned
subsidiary, entered into a new revolving credit facility agreement replacing its
previous revolving line of credit. The new credit facility has an available line
of $60 million. At January 31, 1997, Wright Express had $31.4 million
outstanding under the new credit facility. The new credit facility expires
February 8, 1999.
All costs related to the mergers with Davidson, Sierra and Ideon have been
reflected in the Company's consolidated statement of income for the year ended
January 31, 1997. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs. Such costs associated with the Ideon Merger include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Notes B and I to the Consolidated Financial
Statements) giving consideration to the Company's intended approach to these
matters. Most of the provision is related to these outstanding litigation
matters. The Company is unable at this time to determine the estimated timing of
the future cash outflows with respect to this liability. Although the Company
has attempted to estimate the amounts that will be required to settle these
litigation matters, there can be no assurance that the actual aggregate amount
of such settlements will not exceed the amount of the provision accrued.
The Company invested approximately $60.6$55.9 million in acquisitions, net of cash
acquired, during fiscal 1996. These1997. Substantially all acquisitions have been fully
integrated into the Company's operations. The Company is not aware of any
trends, demands or uncertainties that will have a material effect on the
Company's liquidity other than those relating to accounts receivable.the above-mentioned litigation
matters. The Company anticipates that cash flowflows from operations and its credit
agreementfacilities will be sufficient to achieve its current long-term objectives.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases. Future repurchases will
be based upon market conditions and cannot be currently ascertained.
Repurchases, if any, would be funded through the Company's available cash or
availability under its credit agreement and would thus reduce liquidity.
-14-
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $30.2$59.7 million for the year ended January
31, 1996.1997.
-17-
On February 11, 1997, the Company issued $550 million in principal amount of 3%
convertible subordinated notes (the "3% Notes") due February 15, 2002. Interest
on the 3% Notes is payable semi-annually on February 15 and August 15 of each
year, commencing August 15, 1997 (see Note M to the Consolidated Financial
Statements).
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
will initially be financed through excess cash flowflows from operations, and the
Company's credit agreement.New Credit Agreement (see Note E to the Consolidated Financial
Statements) and from the issuance of the 3% Notes. However, depending on the
financing necessary to complete an acquisition, additional funding may be
required.
The Accounting Standards Executive Committee's Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs," requires that all advertising
expenditures that are not for direct response advertising, be expensed as
incurred or the first time the advertising takes place. The Company adopted the
new method of accounting for advertising costs in the first quarter of fiscal
1996. The impact of adopting the new method did not have a significant effect on
the Company's financial statements.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's current plans, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted. In fiscal
1997, the Company intends to adoptadopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."Compensation"
(see Notes A and F to the Consolidated Financial Statements).
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will adoptadopted SFAS No. 121 in fiscal 1997, and1997. The impact of
adopting the impact, if any, isnew method did not expected to be material.have a significant effect on the Company's
financial statements.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts from
these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday selling season.
In fiscal 1996,1997, the Company's international businesses represented less than 10%
of EBIT. Operating in international markets involves dealing with sometimes
volatile movements in currency exchange rates. The economic impact of currency
exchange rate movements on the Company is complex because it is linked to
variability in real growth, inflation, interest rates and other factors. Because
the Company operates in a mix of membership services and numerous countries,
management believes currency exposures are fairly well diversified. To date,
currency exposure has not been a significant competitive factor at the local
market operating level. As international operations continue to expand and the
number of cross-border transactions increases, the Company intends to continue
monitoring its currency exposures closely and take prudent actions as
appropriate.
-15-Forward-Looking Statements
Except for historical information contained herein, the above discussion
contains certain forward-looking statements that involve potential risks and
uncertainties. The Company's future results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, changes in market conditions, effects of state
and federal regulations and risks inherent in international operations. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof or to reflect the occurrence of
unanticipated events.
-18-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-16--19-
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying consolidated balance sheets of CUC
International Inc. ("CUC") as of January 31, 19961997 and 1995,1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended January 31, 1996.1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Advance Ross Corporation, athe following wholly-owned subsidiary, which statements reflect
total assets of $64.1 millionsubsidiaries: Davidson & Associates,
Inc. ("Davidson") as of December 31, 1994 (included in the January
31, 1995 consolidated balance sheet), and total revenues of $66.5 million and
$50.3 million, for the years ended December 31,
1995 and 1994, Sierra On-Line, Inc. ("Sierra") as of March 31, 1996 and 1993, respectively
(includedfor the
years ended March 31, 1996 and 1995 and Ideon Group, Inc. ("Ideon") as of
December 31, 1995 and for the year ended December 31, 1995 and the year ended
October 31, 1994. Effective January 1, 1995, Ideon changed its fiscal year end
from October 31 to December 31 (the "Ideon Transition Period"). We also did not
audit the statement of operations for the Ideon Transition Period which includes
a loss of $49.9 million included as a charge to retained earnings in the 1996
consolidated financial statements. These financial statements reflect, as of
incomeJanuary 31, 1996, total assets constituting 31.5% of the consolidated financial
statements total and reflect total revenues constituting 27.6% and 28.2% of the
consolidated financial statements totals for the years ended January 31, 1996
and 1995, respectively, and 1994, respectively). Those statements were audited by other auditors whose report hasreports have
been furnished to us, and our opinion, insofar as it relates to data includedDavidson, Sierra
and Ideon for Advance Ross Corporation,the periods indicated above, is based solely on the reportreports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reportreports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and as to the January 31, 1995 and 1994
consolidated financial statements the reportreports of other auditors, referred to
above, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CUC International Inc. at January 31,
19961997 and 1995,1996, and the consolidated results of theirits operations and theirits cash flows
for each of the three years in the period ended January 31, 1996,1997, in conformity
with generally accepted accounting principles. Also, in our opinion, based upon
our audits and the reports of other auditors, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Stamford, Connecticut
March 19, 1996
-17-10, 1997
-20-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advance Ross Corporation
Chicago, IllinoisStockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the consolidated balance sheet of Advance Ross CorporationSierra On-Line Inc. and
subsidiaries (the "Company") as of DecemberMarch 31, 1994,1996 and the related consolidated
statements of income, changes in shareholders'operations, stockholders' equity, and cash flows for each of the
two years in the period ended DecemberMarch 31, 1994 and 1993.1996, not presented separately herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advance Ross Corporationthe Company as of
March 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
June 24, 1996
-21-
Independent Auditors' Report
The Board of Directors
Davidson & Associates, Inc.
We have audited the consolidated balance sheet of Davidson & Associates, Inc.
and subsidiaries as of December 31, 1995 and the related consolidated statements
of earnings, shareholders' equity and cash flows and related financial statement
schedule for each of the years in the two-year period ended December 31, 1995,
not presented separately herein. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Davidson &
Associates, Inc. and subsidiaries as of December 31, 1995 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
KPMG PEAT MARWICK LLP
Long Beach, California
February 21, 1996
-22-
Report of Independent Certified Public Accountants
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated financial statements of Ideon Group, Inc.
(formerly known as SafeCard Services, Incorporated), and its subsidiaries (not
presented separately herein), present fairly, in all material respects, the
financial position of Ideon Group, Inc. and its subsidiaries at December 31,
1994,1995, and the results of their operations and their cash flows for the yearsyear
ended December 31, 1995, the two months ended December 31, 1994, and 1993,the year
ended October 31, 1994, in conformity with generally accepted accounting
principles. DELOITTE & TOUCHEThese financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Ideon Group,
Inc. for any period subsequent to December 31, 1995.
As discussed in Note 1, the Company changed the amortization periods for
deferred subscriber acquisition costs effective December 31, 1994.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 13, 1995
-18-Tampa, Florida
February 2, 1996
-23-
CUC International Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
January 31
1997 1996
1995
--------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 269,987 $209,054553,144 $ 333,036
Marketable securities 69,139 97,164
Receivables, less allowanceallowances of $10,705$55,225 and $10,548 297,842 224,856
Membership solicitations in process 60,713 45,636$39,051 578,630 463,492
Prepaid membership materials 37,579 39,061 33,268
Prepaid expenses, deferred income taxes and other 100,104 71,892
--------------------------------191,583 158,523
------------------------
Total current assets 767,707 584,7061,430,075 1,091,276
Marketable securities -- 13,328
Membership solicitations in process 76,281 60,713
Deferred membership acquisition costs 401,564 404,655
Contract renewal rights, net 37,943 44,70531,695 38,845
Excess of cost over net assets acquired, net 238,104 167,311334,343 293,961
Properties, net 61,441 43,357145,620 113,353
Deferred income taxes and other 36,111 38,558
--------------------------------53,794 52,065
------------------------
Total assets $1,141,306 $878,637
================================$2,473,372 $2,068,196
========================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable, and accrued expenses and other current liabilities $ 124,902 $134,578405,388 $ 296,048
Federal and state income taxes 24,943 25,691
--------------------------------75,988 35,957
------------------------
Total current liabilities 149,845 160,269481,376 332,005
Deferred membership income net 240,117 209,885702,359 682,823
Convertible debt (net of unamortized original issue discount
of $488 and $586) 23,487 23,389
Zero coupon convertible notes (net of unamortized original issue
discount of $588$588) -- 14,410
Other 11,060 13,046
Commitments and $2,507) 14,410 15,046
Other 9,722 13,274contingencies (Notes B and I)
Shareholders' equity:
Common stock--parstock-par value $.01 per share; authorized 400600 million shares;
issued 191,820,896409,011,654 shares and 185,359,196385,576,801 shares 1,918 1,8544,090 3,856
Additional paid-in capital 323,704 222,660619,532 430,449
Retained earnings 434,407 271,128722,354 601,472
Treasury stock, at cost, 3,410,6316,136,757 shares and 2,757,8945,115,947 shares (56,618) (30,998)
(10,505)
Unearned ESOP (1,758)Restricted stock, deferred compensation (28,212) --
Foreign currency translation adjustment (1,819) (3,216)
--------------------------------(6,056) (2,256)
------------------------
Total shareholders' equity 727,212 480,163
--------------------------------1,255,090 1,002,523
------------------------
Total liabilities and shareholders' equity $1,141,306 $878,637
================================$2,473,372 $2,068,196
========================
See accompanying notes.
-19--24-
CUC International Inc. and Subsidiaries
Consolidated Statements of Income
(Dollar amounts in thousands, except per common share amounts)
Year ended January 31,
1997 1996 1995
1994
--------------------------------------------------------------------------------------
Revenues
Membership, and service fees $1,414,964 $1,182,896 $984,801and other $ 1,972,430 $1,643,242 $1,363,561
Software 375,225 291,990 191,050
--------------------------------------
Total revenues 2,347,655 1,935,232 1,554,611
Expenses
(income)
Operating 379,919 320,773 267,772701,262 593,508 474,126
Marketing 556,920 479,590 394,505887,852 737,440 618,330
General and administrative 207,401 180,166 162,231311,904 281,628 223,010
Merger, costs 5,247integration, restructuring and litigation
charges associated with business combinations 179,945 -- --
Costs related to Ideon products abandoned and restructuring -- 97,029 7,900
Gain on sale of The ImagiNation Network -- -- (19,739)
Equity in loss from The ImagiNation Network -- -- 1,990
Interest (income) expense,income, net (866) 582 7,035
------------------------------------------------(9,549) (9,685) (7,937)
--------------------------------------
Total expenses 1,148,621 981,111 831,543
------------------------------------------------2,071,414 1,699,920 1,297,680
--------------------------------------
Income before income taxes 266,343 201,785 153,258276,241 235,312 256,931
Provision for income taxes 102,969 77,219 59,107
------------------------------------------------112,142 90,337 94,874
--------------------------------------
Income before cumulative effect of accounting
change for income taxes 164,099 144,975 162,057
Cumulative effect of accounting change for income taxes -- -- 2,000
--------------------------------------
Net income $ 163,374164,099 $ 124,566144,975 $ 94,151
================================================164,057
======================================
Income before cumulative effect of accounting change $ .41 $ .37 $ .42
Cumulative effect of accounting change -- -- .01
--------------------------------------
Net income per common share $ .84.41 $ .66.37 $ .51
================================================.43
======================================
See accompanying notes.
-20--25-
CUC International Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollar amounts in thousands, except per common share amounts)
Foreign
Common Stock Restricted Foreign
----------------------- Additional Stock, Currency Total
--------------------------Shares Par Paid-in Retained Treasury Unearned Deferred Translation Shareholders'
Shares Issued Par Value Capital Earnings Stock ESOP Compensation Adjustment Equity
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARYBalance at January 31, 1993 117,179,3081994 241,402,217 $2,414 $199,358 $378,604 $ 1,172 $133,608(9,745) $(7,160) $(5,290) $ 57,651 $(9,745) $(11,667) $(3,638) $ 167,381558,181
Three-for-two stock split 58,589,162 586 (586) 0
----------------------------------------------------------------------------------------------------120,701,109 1,207 (1,207) -
-----------------------------------------------------------------------------------------------------
As restated 175,768,470 1,758 133,608 57,065362,103,326 3,621 199,358 377,397 (9,745) (11,667) (3,638) 167,381(7,160) (5,290) 558,181
Exercise of stock options
($.36.24 to $12.67) 1,810,588 18 6,351 6,369$21.97) 6,334,419 63 47,331 (10,140) 37,254
Exercise of stock
options ($1.01 to
$5.41) by payment of
cash and common
stock (56,250 shares) 281,250 3 1,164 (760) 407
Issuance of stock under
stock purchase plan
($12.6711.60 to $17.92) 71,031 1,364 1,364
Cancellation of stock under
restricted stock plan (113,063) (1) (240) (241)$14.05) 73,476 1 1,010 1,011
Stock issued in conversion
of notes 3,897,290 39 18,316 18,3554,483,656 45 22,650 22,695
Tax benefit arising from
exercise of stock
options and vesting of
restricted stock 20,748 20,748
Amortization of restricted
stock plan 871 871
Amortization of ESOP obligation 4,507 4,507
Dividends on preferred stock (25) (25)
Foreign currency translation
adjustment (1,433) (1,433)
Net income 94,151 94,151
-------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1994 181,434,316 1,814 181,018 151,191 (9,745) (7,160) (5,071) 312,047
Exercise of stock options
($.36 to $17.92) 1,875,533 19 10,016 10,035
Exercise of stock options
($1.52 to $8.11) by
payment of cash and
common stock
(37,500 shares) 187,500 2 1,165 (760) 407
Issuance of stock under stock
purchase plan
($17.40 to $21.07) 48,984 1 1,010 1,011
Stock issued in
conversion of notes 1,737,863 17 8,781 8,798
Tax benefit arising
from exercise of
stock options and
vesting of restricted
stock 18,816 18,81642,216 42,216
Stock issued in connection
with acquisition 75,000 1 1,551 1,552acquisitions 569,777 6 5,132 5,138
Amortization of restricted
stock plan 303 303
Amortization of ESOP
obligation 2,331 2,331
Dividends on Getko and Advance Ross
preferred stock (562) (562)Cash dividends (7,519) (7,519)
Charge to reflect change
in Getko and NAOG
fiscal years (4,067) 3,071 (996)
Net unrealized loss on
marketable securities (748) (748)
Purchase of treasury stock 4,322 (440) (440)
Foreign currency
translation adjustment 1,855 1,8552,193 2,193
Net income 124,566 124,566
-------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY164,057 164,057
-----------------------------------------------------------------------------------------------------
Balance at January 31, 1995 185,359,196 1,854 222,660 271,128373,850,226 3,739 317,976 519,728 (10,505) (1,758) (3,216) 480,163(3,097) 826,083
Exercise of stock options
($0.01 to $27.00) 4,319,513 43 32,626 32,669$35.07) 6,945,381 70 34,462 34,532
Exercise of stock
options ($1.521.01 to
$18.00)$12.00) by payment of
cash and common stock
(445,899(668,849 shares) 1,658,334 17 13,0762,487,501 25 13,068 (13,090) 3
Payment of withholding
taxes on options by
payment of common stock
(206,838(310,257 shares) (7,403) (7,403)
Issuance of stock under
stock purchase plan
($23.3115.54 to $32.63) 53,824 1,624 1,624$21.75) 95,471 1 1,789 1,790
Stock issued in conversion
of notes 387,882 4 2,279 2,2832,120,726 21 13,641 13,662
Stock issued for bonuses
and incentives 334,949 3 4,104 4,107
Tax benefit arising from
exercise of stock
options 49,203 49,20351,357 51,357
Stock issued in connection
with acquisition 42,147 994 994acquisitions 335,094 3 1,089 1,092
Amortization of ESOP
obligation 1,242 1,758 3,000
Equity distributions 175 (5,033) (4,858)
Cash dividends (8,159) (8,159)
Charge to reflect change
in Advance Ross and
Ideon fiscal year (95) (95)years (50,039) (50,039)
Net unrealized gain on
marketable securities 1,341 1,341
Purchase of treasury stock (592,547) (6) (9,795) (9,801)
Foreign currency
translation adjustment 1,397 1,397841 841
Net income 163,374 163,374
--------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY144,975 144,975
-----------------------------------------------------------------------------------------------------
Balance at January 31, 1996 191,820,896 $1,918 $323,704 $434,407 $(30,998)385,576,801 3,856 430,449 601,472 (30,998) (2,256) 1,002,523
Exercise of stock options
($0.05 to $24.67) 7,294,093 73 37,807 37,880
Exercise of stock options
($1.02 to $16.78) by
payment of cash and
common stock
(583,354 shares) 2,200,965 22 14,445 (14,630) (163)
Payment of withholding
taxes on options by
payment of common stock
(437,456 shares) (10,990) (10,990)
Issuance of stock under
stock purchase plan
($19.92 to $26.75) 123,512 1 2,982 2,983
Stock issued in conversion
of notes 3,385,612 34 14,760 14,794
Tax benefit arising from
exercise of stock
options 48,922 48,922
Stock issued in connection
with acquisitions 9,065,671 91 40,320 (34,125) 6,286
Restricted stock issuance 1,365,000 13 30,472 $(30,485) -
Amortization of restricted
stock 2,273 2,273
Equity distributions (1,620) (1,620)
Cash dividends (2,798) (2,798)
Charge to reflect change
in Davidson, Sierra and
Ideon fiscal years (4,674) (4,674)
Net unrealized loss on
marketable securities (625) (625)
Foreign currency
translation adjustment (3,800) (3,800)
Net income 164,099 164,099
=====================================================================================================
Balance at January 31, 1997 409,011,654 $4,090 $619,532 $722,354 $(56,618) $ 0 $(1,819) $727,212
==================================================================================================- $(28,212) $(6,056) $1,255,090
=====================================================================================================
- 21 -See accompanying notes.
-26-
CUC International Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year ended January 31,
1997 1996 1995
1994
------------------------------------------------------------------------------
Operating activities
Net income $ 163,374164,099 $ 124,566144,975 $ 94,151164,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Membership acquisition costs (463,958) (388,366) (344,024)(638,182) (605,058) (508,807)
Amortization of membership acquisition costs 417,104 361,038 314,207641,272 556,548 467,019
Deferred membership income 65,235 45,450 54,073
Amortization of prepaid commissions 47219,298 76,285 61,941
Membership solicitations in process (15,568) (15,077) (2,693)
Amortization of contract renewal rights and excess
cost 19,702 15,375 15,74726,199 24,349 27,058
Gain on sale of The ImagiNation Network -- -- (19,739)
Equity loss from The ImagiNation Network -- -- 1,990
Write-off of purchased in-process research and
development -- -- 3,587
Cumulative effect of change in accounting for
income taxes -- -- (2,000)
Deferred income taxes 16,276 6,356 (1,734)(35,970) (32,068) 12,487
Amortization of original issue discount on
convertible notes and restricted stock 4,350 1,646 1,965
3,854Loss on impairment of assets -- 7,569 --
Depreciation 15,417 10,959 10,29032,459 25,387 16,405
Effect of change in amortization periods for Ideon
membership acquisition costs -- 65,500 --
Net loss during change in fiscal year-ends (4,674) (49,944) --
Change in working capital items, net of acquisitions:
Increase in receivables, net (67,975) (41,582) (25,975)
Increase in membership solicitations in process (15,077) (2,693) (2,889)
Increase in prepaidReceivables (106,300) (152,392) (51,638)
Prepaid membership materials 3,928 (5,562) (5,844)
(6,350)
Increase in prepaidPrepaid expenses (26,963) (19,506) (13,648)
Net increase in members' deposits, accountsand other current assets (2,342) (36,130) (20,755)
Accounts payable, and accrued expenses and federal
and state income taxes payable 18,944 12,011 38,971193,737 57,891 40,245
Product abandonment and related liabilities (20,796) 20,796 --
Other, net (14,144) (1,413) (868)
--------------------------------------------(956) (30,499) (8,512)
----------------------------------
Net cash provided by operating activities 124,019 118,316 136,277
--------------------------------------------260,554 54,216 176,766
----------------------------------
Investing activities
Proceeds from sale of The ImagiNation Network -- -- 19,739
Loan to The ImagiNation Network, net -- -- (2,895)
Proceeds from sales of marketable securities 137,277 255,916 136,977
Purchases of marketable securities (96,517) (138,198) (161,585)
Acquisitions, net of cash acquired (60,603) (26,601) (14,729)(55,931) (75,142) (63,437)
Acquisitions of properties (30,242) (21,765) (8,912)
--------------------------------------------(59,665) (63,148) (39,561)
----------------------------------
Net cash used in investing activities (90,845) (48,366) (23,641)
--------------------------------------------(74,836) (20,572) (110,762)
----------------------------------
Financing activities
Issuance of common stock 30,316 13,368 7,250
Repayments42,811 35,269 40,321
Proceeds from convertible debt offering, net -- -- 48,250
Payments for purchase of treasury shares -- (9,801) (483)
Equity distributions (1,620) -- --
(Repayments) borrowings of long-term obligations, (2,557) (13,624) (25,766)net (4,003) 1,064 (16,416)
Dividends paid (562) (673)
--------------------------------------------(2,798) (8,159) (7,519)
----------------------------------
Net cash provided by (used in) financing activities 27,759 (818) (19,189)
============================================34,390 18,373 64,153
----------------------------------
Net increase in cash and cash equivalents 60,933 69,132 93,447220,108 52,017 130,157
Cash and cash equivalents at beginning of year 209,054 139,922 46,475
--------------------------------------------period 333,036 281,019 150,862
----------------------------------
Cash and cash equivalents at end of yearperiod $ 269,987553,144 $ 209,054333,036 $ 139,922
============================================281,019
==================================
See accompanying notes.
-22--27-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATIONNote A--Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CUC International
Inc., its wholly-owned subsidiaries and its wholly-owned subsidiariesjoint ventures (collectively, the
"Company"). The Company operates in onetwo business segment providing a variety ofsegments: membership services
to consumers. Theseand software. Membership services are distributed to consumers through various
channels which include financial institutions, credit unions, charities, other
cardholder based organizations and retail establishments. The software segment
develops, publishes and distributes educational and entertainment software for
home and school use. All significant intercompany transactions have been
eliminated in consolidation. USE OF ESTIMATESAll periods presented reflect the Company's
reclassifications of deferred membership acquisition costs (previously
classified as an offset to deferred membership income) and membership
solicitations in process (previously classified as a current asset) to
non-current assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF INVESTMENTS AND CONCENTRATION OF CREDIT RISKSThe software segment of the Company is subject to certain business risks which
could affect future operations and financial performance. The risks include
(without limitation) changing computer environments, rapid technological change,
development of new products, concentrations in manufacturing facilities,
competitive pricing and reliance on distribution channels.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with terms of
three months or less at the time of acquisition to be cash equivalents. Included
in cash and cash equivalents are marketable securities available-for-sale stated
at fair value which approximates cost.
Concentration of Credit Risks
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. All current assets (with the exception of
marketable securities) and current liabilities are carried at cost, which
approximates fair value, because of their short-term nature. The fair value of
zero coupon convertible notesthe Notes at January 31, 1997 and 1996 was $84$78.3 million and $42.6 million,
respectively, based on theupon its quoted market price.price (see Note E).
-28-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Concentration of Credit Risks (continued)
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable. This risk is limited in
the membership services segment due to the large number of entities representing
the Company's membership base. These entities include major banks, financial
institutions and large oil companies and retailers which are primarily located
throughout the United States. DEFERRED MEMBERSHIP INCOME, NETSoftware accounts receivable include amounts
principally from geographically dispersed dealers, distributors, retail chains
and superstores in the software industry, as well as schools and school
districts. The Company performs periodic credit evaluations of its software
customers and maintains reserves which estimate the potential for future product
returns. Such reserves have been included in allowances for accounts receivable.
Software Research and Development Costs and Costs of Software Revenue
Under the criteria set forth in Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility of the product. Costs
meeting this criteria are insignificant and, therefore, research and development
costs related to designing, developing and testing new software products are
charged to operating expenses as incurred. Purchased in-process research and
development costs are charged to expense on the date acquired if it has no
alternative future use and technological feasibility is not established.
Software research and development costs aggregated $66.2 million, $52.9 million
and $36.3 million for the years ended January 31, 1997, 1996 and 1995,
respectively. Costs of software revenue include material costs, manufacturing
labor and overhead and royalties paid to developers and affiliated label
publishers. Costs of software revenue are included in operating expenses and
aggregated $109.6 million, $115.3 million and $73.3 million for the years ended
January 31, 1997, 1996 and 1995, respectively.
Membership Acquisition Costs and Deferred Membership Income
In accordance with the provisions of Statement of Position 93-7, "Reporting on
Advertising Costs," membership acquisition costs are deferred and charged to
operations as membership fees are recognized. These costs, which relate directly
to membership solicitations (direct response advertising costs), principally
include: postage, printing, kits, mailings, publications (including coupon
books) and telemarketing costs. Substantially all of these costs are incurred
for services performed by outside sources. Such costs are amortized on a
straight-line basis as revenues are realized over the average membership period
which
averages twelve months.(generally one to three years). The membership acquisition costs incurred
applicable to obtaining a new member, for memberships other than coupon book
memberships, generally approximate the initial membership fee. Initial
membership fees for coupon book memberships generally exceed the membership
acquisition costs incurred applicable to obtaining a new member. However, if
membership acquisition costs were to exceed the membership fee, an appropriate
adjustment would be made for any significant impairment.
-23-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization of membership acquisition costs, including deferred renewal costs,
which consist principally of charges from sponsoring institutions and
publications, amounted to $417.1$641.3 million, $361$556.5 million and $314.2$467.0 million for
the years ended January 31, 1997, 1996 1995 and 1994,1995, respectively. All advertising
costs other than direct response advertising costs are expensed in the period
incurred. Such amounts were $139.8$246.6 million, $118.6$172.3 million and $80.3$133.8 million
for the years ended January 31, 1997, 1996 and 1995, respectively.
-29-
CUC International Inc. and 1994, respectively.Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Membership Acquisition Costs and Deferred Membership Income (continued)
Membership fees are generally billed through financial institutions and other
cardholder based institutions and are recorded as deferred membership income
upon acceptance of membership, net of estimated cancellations, and pro-rated
over the membership period.
Deferred membership income net, is classified as a non-current liabilityin the consolidated
balance sheet items since working capital will not be required as the deferred
income is recognized over future periods.
Deferred membership income, net, as of January 31 is comprised
of the following (in thousands):
1996 1995
-------------------------------
Deferred membership income $ 513,219 $ 425,601
Less unamortized membership acquisition costs (273,102) (215,716)
-------------------------------
Deferred membership income, net $ 240,117 $ 209,885
===============================
Provisions for membership cancellations were $27.4$34.5 million and $37.0 million at
January 31, 1997 and 1996, and 1995.respectively. Such amounts are included in accrued
expenses. In addition, accrued expenses include commissions payable of $21$31.2
million and $21.4$21.6 million at January 31, 1997 and 1996, and 1995, respectively, and accrued solicitation costs of $14.6 million
at January 31, 1995.
MEMBERSHIP SOLICITATIONS IN PROCESSrespectively.
Membership Solicitations In Process
These costs consist of initial membership acquisition costs pertaining to
membership solicitation programs that were in process at year-end. Accordingly,
no membership fees had been received or recognized at year-end. The costs are
generally accumulated over a two or three month solicitation period and are
transferred to membership acquisition costs when the membership begins.
CONTRACT RENEWAL RIGHTSSoftware Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement of
Position No. 91-1, "Software Revenue Recognition." Revenue from software sales
is recognized upon shipment, provided no significant vendor obligations remain
and collection of the resulting receivable is deemed probable. Other
insignificant vendor obligations consisting primarily of costs associated with
telephone support to customers after delivery of software are accrued. The
Company's agreements with certain distributors and retailers permit them to
exchange products or provide price protection under certain circumstances. The
Company provides an allowance for estimated exchanges and price protection.
Contract Renewal Rights
Contract renewal rights represent the value assigned to acquired contracts and
are being amortized over 2 to 16 years using the straight-line method. As of
January 31, 19961997 and 1995,1996, accumulated amortization amounted to $50.4$59.0 million
and $44.4$51.5 million, respectively.
EXCESS OF COST OVER NET ASSETS ACQUIREDExcess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is being amortized over 5 to 30
years using the straight-line method. As of January 31, 19961997 and 1995,1996,
accumulated amortization amounted to $42$67.0 million and $30.1$49.1 million,
respectively. The carrying value of the excess of cost over net assets acquired
will be reviewed by management if the facts and circumstances suggest that the
value may be impaired. If this review indicates that the carrying amounts will
not be recoverable, as determined based on the undiscounted cash flows of the
entities acquired over the remaining amortization period, management will reduce
the carrying amount by the estimated shortfall ofin cash flows.
-24--30-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON SHARENote A--Summary of Significant Accounting Policies (continued)
Net Income Per Common Share
Net income per common share of the Company's common stock, par value $.01 per
share ("Common Stock"), has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding (after giving effect to
the acquisitions of Getko Group Inc. ("Getko"), North American Outdoor Group
("NAOG") and Advance Ross Corporation ("Advance Ross")accounted for in accordance with the pooling-of-interests
method (see Note B) and the three-for-two split of the Common Stock (see Note
F)). The weighted average number of common and dilutive common equivalent shares
was 194.7405.1 million, 189.2392.2 million and 183.1379.3 million for the years ended January
31, 1997, 1996 1995 and 1994,1995, respectively. Fully diluted earnings per share did not
differ significantly from primary earnings per share in any year.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investment instruments with termsImpairment of three
months or less at the time of acquisition to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETSLong-Lived Assets
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS")SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will
adoptadopted SFAS No. 121 in fiscal 1997, and the impact if any, isof
which was not expected to be
material.
STOCK BASED COMPENSATIONStock Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Under the Company's current plans, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted. In fiscal
1997, the Company intends to
adoptadopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation."
NOTE B--MERGERS AND ACQUISITIONSCompensation" (see Note F).
Note B--Mergers and Acquisitions
Pooling-of-Interests Business Combinations
During February 1995,July 1996, the Company acquired all of the outstanding capital stock of
Welcome Wagon International,Davidson & Associates, Inc. ("Welcome Wagon"Davidson") and substantially allfor a purchase price of approximately
$1 billion, which was satisfied by the assetsissuance of a related entity, Gifts International, Inc., for $19.5approximately 45.1 million
in
cash. Welcome Wagon provides discounts for local merchants through direct visits
by its representatives to households. In connection with this acquisition, the
Company received current assetsshares of $4.8 million and noncurrent assets of $3.6
million and assumed current liabilities of $4.7 million. The excess of cost over
the fair value of net assets acquired ($15.8 million) is included in the excess
of cost over net assets acquired.
During March 1995,Common Stock. Also during July 1996, the Company acquired all of the
outstanding capital stock of the parentSierra On-Line, Inc. ("Sierra") for a purchase
price of its European licensee, CUC Europe Limited, for $13 million. The
purchase priceapproximately $858 million, which was satisfied by the payment of $12 million in cash and the
issuance of
42,147approximately 38.4 million shares of Common Stock. In connection with this acquisition,Davidson and Sierra develop,
publish and distribute educational and entertainment software for home and
school use. During August 1996, the Company received current assetsacquired all of $4.5the outstanding
capital stock of Ideon Group, Inc. ("Ideon"), principally a provider of credit
card enhancement services, for a purchase price of approximately $393 million,
which was satisfied by the issuance of approximately 16.6 million shares of
Common Stock.
The mergers with Davidson, Sierra and noncurrent assetsIdeon (the "Fiscal 1997 Pooled Entities")
have been accounted for in accordance with the pooling-of-interests method of
$9.6 millionaccounting and, assumed current liabilities of $6.2 millionaccordingly, the accompanying consolidated financial statements
have been restated as if the Fiscal 1997 Pooled Entities and noncurrent
liabilities of $3.3 million. The
-25-the Company had
operated as one since inception. Further, all common share and per common share
data have been restated for prior periods and certain reclassifications have
been made to the historical financial statements to conform to the Company's
presentation.
-31-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)
excessNote B--Mergers and Acquisitions (continued)
The following represents revenues and net income of cost over the fair value of net assets acquired ($8.4 million) is
includedCompany and the Fiscal
1997 Pooled Entities for the two years and the last complete interim period
preceding the mergers.
Six Months
Ended July Year Ended
31, January 31,
1996 1996 1995
----------------------------------------
(Unaudited)
Revenues:
The Company $ 880,403 $ 1,401,551 $1,182,896
Fiscal 1997 Pooled Entities 190,820 533,681 371,715
----------------------------------------
$1,071,223 $ 1,935,232 $1,554,611
========================================
Net Income (Loss):
The Company $ 83,558 $ 164,669 $ 124,566
Fiscal 1997 Pooled Entities 9,024 (19,694) 39,491
----------------------------------------
$ 92,582 $ 144,975 $ 164,057
========================================
Davidson, Sierra and Ideon previously used the fiscal years ended December 31,
March 31 and December 31, respectively, for their financial reporting. To
conform to the Company's January 31 fiscal year end, Davidson's and Ideon's
operating results for January 1996 have been excluded from, and Sierra's
operating results for February and March 1996 have been duplicated in, the
excessCompany's year ended January 31, 1997 operating results in the accompanying
financial statements. The excluded and duplicated periods have been adjusted by
a net $4.7 million charge to retained earnings at January 31, 1997. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to December
31 (the "Ideon Transition Period"). The Ideon Transition Period has been
excluded from the accompanying consolidated statements of cost overincome. Ideon's
revenues and net assets acquired. In addition, during
March 1995,loss for the Ideon Transition Period were $34.7 million and
$(49.9) million, respectively. This excluded period has been adjusted by a $49.9
million charge to retained earnings at January 31, 1996. The net loss for the
Ideon Transition Period was principally the result of a $65.5 million one-time,
non-cash, pre-tax charge recorded in connection with a change in amortization
periods for deferred membership acquisition costs. Prior to the change,
membership acquisition costs were generally amortized up to ten years for single
year membership periods and up to twelve years for multi-year membership
periods. These amortization periods represented the estimated life of the
member. At December 31, 1994, the amortization periods were shortened to one
year and three years for single and multi-year membership periods, respectively
(initial membership period without regard for anticipated renewals).
-32-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
Principally in connection with the Davidson, Sierra and Ideon mergers, the
Company paid $2.4charged approximately $179.9 million ($118.7 million or $.29 per common
share after-tax effect) to operations as merger, integration, restructuring and
litigation charges for the year ended January 31, 1997. Such costs in connection
with the Davidson and Sierra mergers with the Company (approximately $48.6
million) are nonrecurring and are comprised primarily of transaction costs,
other professional fees and integration costs. Such costs associated with the
Company's merger with Ideon (the "Ideon Merger") (approximately $127.2 million)
are nonrecurring and include integration and transaction costs as well as a
provision relating to certain litigation matters (see Note I) giving
consideration to the Company's intended approach to these matters. Most of the
provision is related to these outstanding litigation matters. In determining the
amount of the provision, the Company estimated the cost of settling these
litigation matters. In estimating such cost, the Company considered potential
liabilities related to these matters and the estimated cost of prosecuting and
defending them (including out-of-pocket costs, such as attorneys' fees, and the
cost to the Company of having its management involved in numerous complex
litigation matters). The Company is unable at this time to determine the
estimated timing of the future cash outflows with respect to acquire its European
license. Thisthis liability.
Although the Company has attempted to estimate the amounts that will be required
to settle these litigation matters, there can be no assurance that the actual
aggregate amount has been includedof such settlements will not exceed the amount accrued.
Payments related to the above matters will reduce the amount of the provision.
During the year ended January 31, 1997, such payments amounted to $80.5 million.
The Company considered litigation-related costs and liabilities, as well as
integration and transaction costs, in determining the excessagreed upon exchange ratio
in respect of cost over net assets
acquired.the Ideon Merger.
In determining the amount of the provision related to the Company's proposed
integration and consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger and
costs relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party and
which are neither terminable at will nor automatically terminated upon a
change-in-control of Ideon. The Company incurred significant integration costs
because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and enhancement
services. All of the business activities related to the operations performed by
Ideon's Jacksonville, Florida office were transferred to the Company's
Comp-U-Card Division in Stamford, Connecticut upon the consummation of the Ideon
Merger. The Company does not expect any loss in revenue as a result of these
integration and consolidation efforts.
During March 1995,1996, Davidson acquired all of the outstanding capital stock of
Condor, Inc. (subsequently renamed "Blizzard North"), a developer of
entertainment software. During August 1996, the Company acquired substantially
all of the assets and liabilities of Kevlin Services, Incorporated ("Kevlin")
and one other corporation affiliated with Kevlin for a purchase price of
approximately $27 million, which was satisfied by the issuance of approximately
1.2 million shares of Common Stock. Kevlin provides membership-based consumer
services to customers of financial institutions. During September 1996, the
Company acquired all of the outstanding capital stock of Credit Card Sentinel (U.K.) LimitedDine-A-Mate, Inc.
("CCS"Dine-A-Mate") for $22.5a purchase price of approximately $36 million, in cash. CCS is a
leading providerwhich was
satisfied by the issuance of credit card enhancement services, which are generally
marketed through European financial institutions. In connection with this
acquisition, the Company received current assetsapproximately 1.4 million shares of $7.5 millionCommon Stock.
Dine-A-Mate offers discount dining and noncurrent
assets of $2.3 million and assumed current liabilities of $6.6 million and
noncurrent liabilities of $10.5 million. The excess of cost over the fair value
of net assets acquired ($29.8 million) is included in the excess of cost over
net assets acquired.entertainment program memberships. During
fiscal 1996,January 1997, the Company acquired several small privately-held discount
coupon book publishing companies, certain assets from insurance marketersall of the outstanding capital stock of
Plextel Telecommunications, Inc. ("Plextel"), for a purchase price of
approximately $53
-33-
CUC International Inc. and franchiseesSubsidiaries
Notes to Consolidated Financial Statements (Continued)
Note B--Mergers and certain marketing and future renewal rights forAcquisitions (continued)
million, which was satisfied by the issuance of approximately 2.2 million shares
of Common Stock. Plextel operates an aggregate
cost of $4.2 million. The cost of these acquisitions has been included in the
excess of cost over net assets acquired ($3.7 million) and contract renewal
rights ($.5 million). In addition,affinity-based, computerized dating
service. Also during fiscal 1996January 1997, the Company acquired certain assets from three timeshare-related businessesall of the outstanding
capital stock of Knowledge Adventure, Inc. ("KA"), for an aggregate costa purchase price of
$5.2approximately $86.1 million, which was satisfied by the issuance of
approximately 3.5 million shares of Common Stock. KA designs, develops and
paid $3.7 million to satisfy contingent payment requirements in
connection with previous acquisitions.markets children's educational computer software. These amounts have been included in the
excess of cost over net assets acquired.
The preceding acquisitions were
accounted for in accordance with the purchasepooling-of-interests method of accounting and, accordingly, their results of operations have been
included inaccounting.
However, the consolidated results of operations from the respective dates of
acquisition. The results of these entities' operationsCompany's financial statements for the periods prior to their respectivethe dates of
acquisition werehave not significantbeen restated due to the Company's
operations.immateriality.
During June 1995, the Company acquired all of the outstanding capital stock of
Getko Group Inc. ("Getko") for a purchase price of approximately $100 million,
which was satisfied by the issuance of approximately 3.75.6 million shares of
Common Stock. Getko distributes complimentary welcoming packages to new
homeowners throughout the United States and Canada. During September 1995, the
Company acquired all of the outstanding capital stock of NAOGNorth American Outdoor
Group, Inc. ("NAOG") for a purchase price of approximately $52 million, which
was satisfied by the issuance of approximately 1.52.3 million shares of Common
Stock. NAOG owns one of the largest for-profit hunting and general interest
fishing membership organizations in the United States, and also owns a handymanvarious
other membership organization.organizations. During January 1996, the Company acquired all of
the outstanding capital stock of Advance Ross Corporation ("Advance Ross") for a
purchase price of approximately $183 million, which was satisfied by the
issuance of 5.9approximately 8.9 million shares of Common Stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
-26-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)
The acquisitions of Getko, NAOG and Advance Ross (collectively, the "Pooled"Fiscal 1996
Pooled Entities") were accounted for in accordance with the pooling-of-interests
method of accounting. Therefore, the Company's financial statements have been
restated for all prior periods to include these entities. Further, all common
share and per common share data have been restated for prior periods and certain
reclassifications have been made to the historical financial statements to
conform to the Company's presentation.
The following represents revenues and net income of the Company and the Fiscal
1996 Pooled Entities for the two yearsone year and the last complete interim periodsperiod
preceding the mergers.
Nine Months Ended Year ended January 31,
October 31, 1995 1995 1994
-------------------------- ------------------------------------------
(Unaudited)
Revenues:
The Company $ 949,886 $ 1,044,669 $ 879,324
Pooled Entities 87,130 138,227 105,477
-------------------------- ------------------------------------------
$1,037,016 $ 1,182,896 $ 984,801
========================== ==========================================
Net Income:
The Company $ 113,656 $ 117,591 $ 87,371
Pooled Entities 7,103 6,975 6,780
-------------------------- ------------------------------------------
$ 120,759 $ 124,566 $ 94,151
========================== ==========================================
mergers, not giving effect to the Fiscal 1997 Pooled Entities.
Nine Months Ended Year Ended
October 31, 1995 January 31, 1995
----------------- ----------------
(Unaudited)
Revenues:
The Company $ 949,886 $1,044,669
Fiscal 1996 Pooled Entities 87,130 138,227
---------- ----------
$1,037,016 $1,182,896
========== ==========
Net Income:
The Company $ 113,656 $ 117,591
Fiscal 1996 Pooled Entities 7,103 6,975
---------- ----------
$ 120,759 $ 124,566
========== ==========
-34-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
Getko, NAOG and Advance Ross previously used the fiscal years ended November 30,
December 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year end, Getko's operating results
for December 1993 and January 1994 and NAOG's operating results for January 1994
have been excluded from the Company's year ended January 31, 1995 operating
results in the accompanying financial statements. The excluded periods have been
adjusted by a net $4.1 million charge to retained earnings at January 31, 1995.
In addition, Advance Ross' operating results for January 1995 have been excluded
from the year ended January 31, 1996 operating results in the accompanying
financial statements. This excluded period has been adjusted by a $95,000$0.1 million
charge to retained earnings at January 31, 1996.
In connectionDuring fiscal 1996, Davidson and Sierra acquired all of the outstanding capital
stock of various companies, by issuing an aggregate of .6 million and 2.1
million shares of Davidson's and Sierra's common stock, respectively (.8 million
and 3.9 million equivalent shares of Common Stock, respectively). During fiscal
1995, Davidson acquired all of the outstanding shares of a company, by issuing
.6 million shares of Davidson's common stock (.8 million equivalent shares of
Common Stock).
These acquisitions were accounted for in accordance with the
Advance Ross acquisition,pooling-of-interests method of accounting. Therefore, the Company charged $5.2
million ($4.2 million or $.02financial statements
of Davidson and Sierra, including all common and per common share after-tax effect)data, were
previously restated to include these entities.
Purchase Business Combinations
During fiscal 1997, the Company acquired certain entities for an aggregate
purchase price of $60.1 million, satisfied by the payment of $35.3 million in
cash and the issuance of .3 million shares of Common Stock. One of the purchase
agreements provides that the former shareholders are eligible to receive
additional payments over the next three years, not to exceed $22 million in the
aggregate, based upon the achievement of certain objectives. During fiscal 1996,
operationsthe Company acquired certain entities for merger costs. These costs are nonrecurringan aggregate purchase price of $84.5
million, satisfied by the payment of $82.1 million in cash and comprised
primarilythe issuance of
transaction costs.1 million shares of Common Stock. The 1997 and other professional fees. Costs incurred in
connection with the1996 excess cost over net assets
acquired resulting from these acquisitions of Getkoaggregated $55.0 million and NAOG were not significant to the
Company's results of operations.
-27-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)$80.9
million, respectively.
During January 1995, the Company acquired all of the outstanding capital stock
of Essex Corporation and subsidiaries ("Essex") for $27.5 million. The purchase
price was satisfied by the payment of $25.9 million in cash and the issuance of
75,000.1 million shares of Common Stock. The former shareholders of Essex may receive
additional payments, over the next two years, not to exceed $57.5 million, in the aggregate, based on the
achievement of certain objectives.objectives, through the next fiscal year. The Company's
management believes that payments to such shareholders aggregating in excess of
$30 million would be extremely remote. Essex is a third-party marketer of
financial products for banks, primarily marketing annuities through financial
institutions. In connection with this acquisition, the Company received current
assets of $8.1 million and noncurrentnon-current assets of $1.4 million and assumed
current liabilities of $7$7.0 million. The excessbalance of cost over the fair value of net assets
acquired ($25 million)$25.0 million was included
in the excess of cost over net assets acquired. DuringAdditionally, during fiscal
1995, the Company acquired certain assets from three insurance
marketerscompanies for an aggregate costpurchase price of
$4.1 million.$45.7 million, satisfied by the payment of $42.2 million in cash and the
issuance of .5 million shares of Common Stock. The cost of these acquisitions
has been included in the excess of cost over net
assets acquired ($3.9 million)
and contract renewal rights ($.2 million). In addition, during fiscal 1995 the
Company acquired a privately-held discount coupon book publishing company for $1
million and paid $.9 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
During fiscal 1994, the Company acquired a privately owned insurance marketer
for $6 million. The cost of this acquisition has been included in contract
renewal rights. In addition, during fiscal 1994 the Company acquired a marketer
of accidental death and dismemberment insurance and a company which markets
other insurance products for an aggregate cost of approximately $2.6 million.
The cost ofresulting from these acquisitions has been included in the excess of cost over net
assets acquired ($1.4 million)aggregated $34.1 million.
-35-
CUC International Inc. and contract renewal rights ($1.2 million),
respectively. During fiscal 1994, an additional $5.8 million was paidSubsidiaries
Notes to satisfy
contingent payment requirements in connection with previous acquisitions.
This amount was included in the excess of cost over net assets acquired.
These fiscal 1995Consolidated Financial Statements (Continued)
Note B--Mergers and fiscal 1994Acquisitions (continued)
The preceding acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, the results of operations have been
included in the consolidated results of operations from the respective dates of
acquisition. The results of operations for the periods prior to the respective
dates of acquisition were not significant to the Company's operationsoperations.
Note C--Marketable Securities
Marketable securities consist principally of corporate bonds, tax-free municipal
obligations, U.S. Treasury notes and commercial paper. Management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. All securities at
January 31, 1997 and 1996 were classified as available-for-sale and were
reported at fair value with net unrealized holding gains and losses, net of tax
effect, reported in fiscal 1995shareholders' equity until realized. Fair value was based
upon quoted market prices or investment adviser estimates and 1994.
NOTE C--PROPERTIESany securities not
maturing within one year are classified as non-current assets. Declines in the
market value of available-for-sale securities deemed to be other than temporary
resulted in charges to current earnings and the establishment of a new cost
basis.
Note D--Properties
Property acquired is recorded at cost. Depreciation of properties is provided
for using the straight-line method over the estimated useful lives of the
assets. The following is a summary of properties as of January 31 (in
thousands):
1997 1996
1995
-------------------------------------------------------
Computer equipment $ 48,59397,218 $ 33,79870,077
Telephone equipment 14,366 10,90733,458 34,113
Furniture and other equipment 55,332 42,051
Building 3,758 2,64988,018 74,290
Buildings 37,809 23,309
Leasehold improvements 12,967 10,36421,207 16,798
Less accumulated depreciation (73,575) (56,412)
----------------------------(132,090) (105,234)
---------------------------
Properties, net $ 61,441145,620 $ 43,357
============================
-28-
CUC International Inc.113,353
===========================
Note E--Revolving Credit Facilities and SubsidiariesConvertible Notes to Consolidated Financial Statements (Continued)
NOTE D--REVOLVING CREDIT FACILITY AND ZERO COUPON CONVERTIBLE NOTES
During the second quarter of fiscal 1995, the Company renegotiated its revolving
credit facility provided by General Electric Capital Corporation ("GECC"). The
Amended and Restated Credit Agreement, which was entered into as of June 30,
1994 (the "GECC Credit Agreement"), amended and restated an agreement that the
Company and GECC initially entered into in 1989 and was scheduled to expire June
1, 1997. The GECC Credit Agreement provided for a $100 million revolving credit
facility with interest at LIBOR plus 2 1/4% (7 11/16% at January 31, 1996) on
that portion of the outstanding balance which was less than or equal to $50
million and LIBOR plus 2 1/2% (7 15/16% at January 31, 1996) on the remaining
outstanding balance. In addition, the GECC Credit Agreement required the Company
to maintain certain financial ratios and other restrictive covenants, including
restrictions that preclude the payment of cash dividends on shares of Common
Stock.
The Company has terminated the GECC Credit Agreementits previous credit agreement effective March 19, 1996
and effective March 26, 1996 entered into a new credit agreement during March 1996 with certain
banks signatory thereto; The Chase Manhattan Bank, N.A., Bank of Montreal,
Morgan Guaranty Trust Company of New York and The Sakura Bank, Limited, as
Co-Agents; and The Chase Manhattan Bank, N.A. as Administrative Agent (the "New
Credit Agreement").
The New Credit Agreement provides for a $500 million revolving credit facility
with a variety of different types of loans available thereunder. Interest is
payable, depending on the type of loan utilized by the Company, at a variety of
rates based on the federal funds rate, LIBOR, the prime rate or rates quoted by
participating banks based on an auction process provided for in the New Credit
Agreement. At January 31, 1997, no borrowings under the New Credit Agreement
were outstanding. In addition, the New Credit Agreement requires the Company to
maintain certain financial ratios and contains other restrictive covenants
including, without limitation, financial covenants and restrictions on certain
corporate transactions, and also contains various events of default provisions
including, without limitation, defaults arising from certain changes in control
of the Company.
-36-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note E--Revolving Credit Facilities and Convertible Notes (continued)
The zero coupon convertible notes issued in connection with the Company's fiscal
1990 recapitalization were recorded at their fair value on the date of issuance
and were issued in $100 principal amounts and multiples thereof. Each $100
principal amount iswas convertible into 15.187522.78 shares of Common Stock. TheseVirtually
all of the zero coupon convertible notes are redeemable at any time atwere converted into Common Stock by the
optionmaturity date of the
Company, in whole or in part, at 90.6% of principal amount, increasing ratably
to 100% on June 6, 1996.
No cashCash payments for interest were made underby the Company's credit agreements
with GECCCompany on all its obligations amounted
to $5.7 million, $5.1 million and $4.6 million for the years ended January 31,
1997, 1996 and 1995. Cash payments for
interest thereunder amounted to $.3 million for1995, respectively.
In January 1997, Wright Express Corporation ("Wright Express"), a wholly-owned
subsidiary of the year endedCompany, entered into a new revolving credit facility
agreement replacing its previous revolving line of credit. The new credit
facility has an available line of $60 million. The new credit facility expires
February 8, 1999. Interest on the outstanding borrowings is computed, at the
option of Wright Express, under various methods. At January 31, 1994.
NOTE E--SHAREHOLDERS' EQUITY1997, Wright
Express had $31.4 million outstanding under the new credit facility with an
interest rate of 6.04%. Borrowings under the previous arrangement at January 31,
1996 aggregated $15.4 million with interest rates ranging from 6.31% to 7.25%.
Such amounts are included in other current liabilities.
On April 12, 1994, Sierra issued $50 million in principal amount of 6 1/2%
convertible subordinated notes due April 1, 2001 (the "Notes"). Interest on the
Notes is payable semi-annually on April 1 and October 1 of each year. Each $7.62
principal amount of Notes is convertible into one share of Common Stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of Sierra, at specified redemption prices. The Notes are
subordinated to all existing and future Senior Indebtedness (as defined in the
Indenture governing the Notes) of Sierra. Issuance costs have been netted
against the principal convertible debt balance and are being amortized on a
straight-line basis over seven years. During fiscal 1990, the1996 and 1995, Sierra paid
$0.9 million and $1.0 million, included in interest expense, to induce
conversion of $11.7 million and $14.3 million of Notes into .8 million shares
and 1 million shares of Sierra common stock (1.5 million equivalent shares and
1.9 million equivalent shares of Common Stock), respectively.
Note F--Shareholders' Equity
The Company made an administrative change to its incentivehas authorized capital stock option plans which had the effectconsisting of converting all options granted under
such plans to nonqualified options. Under these plans, options to purchase up to
11,029,922600 million shares of
Common Stock may be granted at not less thanand one million shares of preferred stock, $.01 par value per share
("Preferred Stock"). At January 31, 1997, there were outstanding 402.9 million
shares of Common Stock. The Company has never issued any shares of Preferred
Stock.
On September 26, 1996, the fair
marketCompany's Board of Directors declared a three-for-two
split of the Common Stock, in the nature of a stock dividend, effective October
21, 1996, paid to shareholders of record on October 7, 1996. Accordingly, the
financial statements and all common share and per common share data have been
retroactively adjusted to reflect the stock split. The par value onof the
dateadditional shares of grant. Options granted under these plans are
generally exercisable at 20%Common Stock issued in connection with the stock split was
credited to 25% per year commencing one year from the date
of grant.
-29-Common Stock and charged to retained earnings.
-37-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE E--SHAREHOLDERS' EQUITY (CONTINUED)Note F--Shareholders' Equity (continued)
At January 31, 1997, there were outstanding approximately $24 million principal
amount of Notes, convertible into approximately 3.1 million shares of Common
Stock. The Company also has nonqualified option plans for certain employees. Under
these plans, including options to purchase 8,250,000reserved .6 million shares of Common Stock addedfor
issuance upon the exercise of certain outstanding warrants to purchase Common
Stock which the Company assumed in connection with its acquisition of Advance
Ross during fiscal 1996.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company grants options to employees primarily pursuant to three stock option
plans: the 1992 Employee Stock Option Plan (the "1992 Plan"), the 1992 Bonus and
Salary Replacement Stock Option Plan (the "Replacement Plan") and the 1987 Stock
Option Plan (the "1987 Plan"). Under these plans, during fiscal 1996, nonqualifiedthe Company may grant options
to purchase in the aggregate up to 29,495,17770.8 million shares of Common Stock. At
January 31, 1997, there were outstanding in the aggregate options to purchase
35.5 million shares of Common Stock may bepursuant to the 1992 Plan, the Replacement
Plan and the 1987 Plan. Options granted under the 1992 Plan generally are
exercisable at not less than the fair
market value on20% per year commencing one year from the date of grant. Options
granted under these plansthe Replacement Plan generally are
generally exercisable at 20% to33% per year
commencing one year from the date of grant. Options granted under the 1987 Plan
generally are exercisable at 25% per year commencing one year from the date of
grant. During October 1987, the Board of Directors adopted a plan ("1987 Plan") which,
as amended by a vote of the shareholders at the Company's fiscal 1992 annual
meeting, authorized the issuance of options for up to 17,718,750 shares of
Common Stock. The 1987 Plan grants the Board of Directors the discretion to
designate these options as incentive stock options or nonqualified stock
options. Options granted under the 1987 Plan areCompany's stock option plans generally exercisable at 20% to
25% perhave 10
year commencing one year from the date of grant. During fiscal 1996, the
Company's shareholders approved an amendment of the 1987 Plan to increase the
number of shares of Common Stock authorized for issuance under the 1987 Plan to
23,718,750 shares of Common Stock.
During June 1991, the Company's shareholders approved a plan authorizing the
issuance ofterms. All options to the Company's non-employee directors to purchase up to
759,375 shares of Common Stock at not less than the fair market value on the
date of grant. In addition, during June 1993, the Company's shareholders
approved the 1992 Directors Stock Option Plan ("the 1992 Directors Plan"). The
1992 Directors Plan provides that options to acquire an aggregate of up to
450,000 shares of Common Stock may be granted to non-employee Directors. As of
January 31, 1996, nonqualified options to purchase 669,375 shares of Common
Stock have been granted under these two plans. Options grantedoutstanding under these plans are generally exercisable at 20%non-qualified stock
options. These stock option plans include options acquired by the Company in
connection with its various acquisitions accounted for in accordance with the
pooling-of-interests method of accounting (see Note B).
The Company grants options to 25% per year commencing one year from the
date of grant.
In addition, during fiscal 1996, the Company's shareholders approved theits non-employee directors pursuant to its 1994
Directors Stock Option Plan ("the 1994(the "1994 Directors Plan"). The 1994 Directors Plan
provides that options to acquire an aggregate of up to 225,000.3 million shares of
Common Stock may be granted to non-employee directors of the Company in office
on each of November 23, 1994, 1995, 1996 and 1997. Options granted under the 1994
Directors Plan are generally exercisable in full on the date of grant. As ofAt January 31,
1996,1997, there also were outstanding grants made to non-employee directors of the
Company under the Company's 1990 Directors Stock Option Plan (the "1990
Directors Plan") and 1992 Directors Stock Option Plan (the "1992 Directors
Plan"), under which the Company is no longer granting options.
The Company has certain other stock option plans pursuant to which it no longer
makes any new option grants, but pursuant to which there continues to exist
outstanding options to purchase 97,500shares of Common Stock. These options generally
expire ten years after their grant dates. Under these plans, there are currently
outstanding both non-qualified stock options and incentive stock options to
purchase 3.8 million shares of Common Stock have been
granted underin the plan.
As ofaggregate at January 31,
19961997. These stock option plans include plans assumed by the Company in
connection with its acquisitions of Sierra and 1995, options to purchase 6,375,244 and
6,078,894 shares of Common Stock, respectively, were exercisable.
Changes in outstanding options were as follows:
Outstanding January 31, 1994 22,066,036
Options granted 7,379,794
Options exercised (2,063,033)
Options cancelled (332,220)
----------------
Outstanding January 31, 1995 27,050,577
Options granted 3,043,935
Options exercised (5,977,847)
Options cancelled (624,987)
----------------
Outstanding January 31, 1996 23,491,678
================
-30-KA during fiscal 1997.
-38-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE E--SHAREHOLDERS' EQUITY (CONTINUED)Note F--Shareholders' Equity (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
January 31, 1995 under the fair value method of that Statement. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for fiscal 1997
and 1996, respectively: risk-free interest rates of 6.3% and 5.3%; volatility
factors of the expected market price of the Company's common stock of .28 and
.26; and a weighted-average expected life for the options of 5 years for both
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income would have been approximately $154.4 million and $142.5 million
and pro forma net income per common share would have been $.38 and $.36 for the
fiscal years ended January 31, 1997 and 1996, respectively.
In accordance with the provisions of SFAS No. 123, the pro forma disclosures
include only the effect of stock options granted in fiscal 1996 and fiscal 1997.
These pro forma effects may not be representative of the effects of SFAS No. 123
on future years because of the fact that options vest over several years and new
grants generally are made each year.
Changes in outstanding options were as follows:
Weighted-Average
Options Exercise Price
---------------------------------
Outstanding January 31, 1994 40,407,897 $ 6.33
Options granted 15,152,418 $ 12.36
Options exercised (6,615,669) $ 3.73
Options cancelled (1,005,478) $ 6.43
--------------
Outstanding January 31, 1995 47,939,168 $ 8.35
Options granted 7,193,868 $ 16.71
Options exercised (9,432,882) $ 5.33
Options cancelled (1,834,083) $ 9.08
--------------
Outstanding January 31, 1996 43,866,071 $ 10.02
Options granted 7,619,780 $ 18.98
Options exercised (9,495,058) $ 5.63
Options cancelled (1,604,747) $ 15.08
--------------
Outstanding January 31, 1997 40,386,046 $ 12.81
==============
-39-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
As of January 31, 1997, 1996 and 1995, there were options exercisable of
11,818,528, 12,193,065 and 10,610,540, respectively. Outstanding options at
January 31, 1996 have1997 had exercise prices ranging from $.36$0.01 to $35.75.$35.07. The
weighted-average value of options granted during fiscal 1997 and 1996 was $7.51
and $6.69, respectively.
The following table summarizes information concerning outstanding and
exercisable options as of January 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------
$ 0.01 -$10.00 11,234,664 5.54 $ 5.10 7,424,541 $ 4.71
$10.01 -$20.00 21,877,942 7.76 $13.47 3,881,386 $12.91
$20.01 -$30.00 6,989,851 9.26 $22.56 286,257 $25.54
$30.01 -$40.00 283,589 7.43 $31.64 226,344 $31.37
-----------------------------------------------------------------------------------
40,386,046 7.41 $12.91 11,818,528 $ 8.40
===================================================================================
The Company has an employee stock purchase plan for which 750,000reserved 11,390,625 shares of Common Stock for issuance in
connection with its 1989 Restricted Stock Plan. As of January 31, 1997,
10,494,423 shares of restricted Common Stock had been granted under this plan.
During fiscal 1997, 720,000 shares of restricted Common Stock were authorized. Thisgranted under
the plan and 645,000 shares of restricted Common Stock were granted other than
under the plan. The aggregate fair value on the date of grant of such restricted
Common Stock was $30.5 million, which amount was deducted from shareholders'
equity and is being amortized over the vesting period of 10 years.
The Company has reserved 1,125,000 shares of Common Stock in connection with its
1994 Employee Stock Purchase Plan, which enables employees to purchase the
Company'sshares of
Common Stock from the Company at 90% of the fair market value on the fifteenth
day following the last day of each calendar quarter. The remaining 10% is chargedquarter, in an amount up to
compensation expense. Employees may not purchase in excess of 25% of
theirthe employees' year-to-date earnings.
The following summarizes shares of Common Stock reserved for issuance as of
January 31, 1996:
Zero coupon convertible notes 2,278,088
Restricted stock plan 913,8321997:
Conversion of Notes 3,146,720
Exercise of outstanding Warrants 600,000
Stock options granted 23,491,678Options outstanding 40,386,046
Stock Options not yet granted 10,012,7068,357,529
Restricted stock plan not yet granted 896,202
Stock purchase plan 647,192
----------------
37,343,496
================
In July 1989, Getko established an Employee Stock Ownership Plan ("ESOP") for
substantially all of its employees by purchasing 40,300 shares of its
convertible preferred stock which was financed by a $15 million bank loan
guaranteed by Getko. Compensation expense resulting from the ESOP amountednot yet purchased 847,276
----------
54,233,773
==========
-40-
CUC International Inc. and Subsidiaries
Notes to $1.8 million, $5.4 million and $4.5 million for the years ended January 31,
1996, 1995 and 1994, respectively. During fiscal 1996, the remaining loan amount
was repaid with the proceeds from the sale of unallocated ESOP shares and the
remaining ESOP shares were distributed to participants.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases.
The Company has also authorized one million shares of voting preferred stock,
$.01 par value. No shares of preferred stock have been issued.
NOTE F--INCOME TAXESConsolidated Financial Statements (Continued)
Note G--Income Taxes
The components of income before income taxes for the years ended January 31 are
as follows (in thousands):
1997 1996 1995
1994
--------------------------------------------------------------------------------------
Domestic $245,711 $184,984 $142,860$237,567 $210,211 $238,219
Foreign 20,632 16,801 10,398
----------------------------------------------------
$266,343 $201,785 $153,258
====================================================
-31-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE F--INCOME TAXES (CONTINUED)38,674 25,101 18,712
==================================
$276,241 $235,312 $256,931
==================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of January 31 are as
follows (in thousands):
1996 1995
------------------------
Deferred tax assets:
Deferred membership income and acquisition costs, net $26,208 $30,685
Other accrued liabilities 4,660 4,626
Recapitalization expenses 1,181 862
Compensatory stock options 2,481 2,456
All other 4,888 4,776
------------------------
Total deferred tax assets 39,418 43,405
Deferred tax liabilities:
Insurance retention refund 19,546 13,229
Depreciation 5,775 1,273
All other 6,668 5,198
---------------------------
Total deferred tax liabilities 31,989 19,700
---------------------------
Net deferred tax assets $ 7,429 $23,705
===========================
1997 1996
------------------
Deferred tax assets:
Deferred membership income and acquisition costs, net $ 15,931 $18,421
Other accrued liabilities 34,908 10,836
Recapitalization expenses -- 1,181
Merger and litigation expenses 27,169 --
Compensatory stock options 3,984 972
Net operating loss carryforwards 1,347 1,347
Relocation expenses 3,630 3,439
Amortization 1,627 --
All other 13,099 9,060
-------- -------
Total deferred tax assets 101,695 45,256
Deferred tax liabilities:
Insurance retention refund 22,612 19,546
Depreciation 7,897 7,195
All other 9,447 6,569
------------------
Total deferred tax liabilities 39,956 33,310
------------------
Net deferred tax assets $ 61,739 $11,946
==================
The provision (benefit) for income taxes consists of the following for the years
ended January 31 (in thousands):
1997 1996 1995
1994
---------------------------------------------------------------------------------
Current:
Federal $ 73,703127,075 $ 57,77472,665 $ 52,14383,333
State 6,591 7,856 6,15011,880 9,820 10,351
Foreign 6,399 5,233 2,548
----------------------------------------
86,693 70,863 60,8419,157 7,606 5,178
-----------------------------------------
148,112 90,091 98,862
Deferred:
Federal 15,152 4,746 (1,456)(33,515) 493 (5,544)
State 924 637 (262)(2,839) (447) 791
Foreign 384 200 973 (16)
----------------------------------------
16,276 6,356 (1,734)
----------------------------------------765
-----------------------------------------
(35,970) 246 (3,988)
-----------------------------------------
Total provision $ 102,969112,142 $ 77,21990,337 $ 59,107
========================================
-32-94,874
=========================================
-41-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE F--INCOME TAXES (CONTINUED)Note G--Income Taxes (continued)
A reconciliation of the provision for income taxes at the Federal statutory rate
to the Company's consolidated tax provision follows for the years ended January
31 (in thousands):
1996 1995 1994
-------------------------------------------
Income tax at statutory rate (35%) $ 93,220 $70,625 $53,640
State income taxes, net of Federal benefit 4,885 4,910 4,117
Foreign taxes differential 825 1,352 (363)
Amortization of excess costs 2,952 2,120 1,999
Other, net 1,087 (1,788) (286)
-------------------------------------------
$ 102,969 $77,219 $59,107
===========================================
1997 1996 1995
-------------------------------
Income tax at statutory rate (35%) $ 96,684 $ 81,778 $ 89,926
State income taxes, net of Federal benefit 5,525 7,334 6,769
Foreign taxes differential 948 825 1,352
Tax exempt interest (1,761) -- (2,613)
Amortization of excess costs 4,200 4,627 2,237
Technology under development -- -- 1,381
Nonconsolidated losses -- -- (849)
Merger costs 9,998 -- --
Other, net (3,452) (4,227) (3,329)
-------------------------------
$ 112,142 $ 90,337 $ 94,874
===============================
Income tax payments amounted to $38.5$29.0 million, $43.1$56.3 million and $55.3 million
for the years ended January 31, 1997, 1996 and 1995, respectively.
Note H--Transactions with Related Parties
Ideon
Until his resignation as Chief Executive Officer and a director of SafeCard
Services, Incorporated ("SafeCard"), a subsidiary of Ideon, on December 19,
1992, Steven J. Halmos, SafeCard's co-founder, provided his services to SafeCard
through High Plains Capital Corporation ("HPCC"), a company owned by himself and
his brother, Peter Halmos, SafeCard's other co-founder. After that date, Steven
J. Halmos, acting in the capacity of an Advisor on Marketing and Operational
Strategy, provided services directly to SafeCard pursuant to a written agreement
(as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement").
On May 26, 1994, SafeCard reached a settlement with Steven J. Halmos to
terminate the Steven J. Halmos Agreement and various other agreements between
SafeCard and Mr. Halmos that provided for payments to Mr. Halmos of $2 million a
year through March 31, 1998. The settlement, which arose in connection with
Ideon's management restructuring in April 1994 and a resulting decision to cease
using Mr. Halmos' services, resulted in a $4.4 million cash payment to Mr.
Halmos and charge to fiscal 1995 earnings. Subsequent to his termination Mr.
Halmos exercised options to purchase 3.9 million shares of Ideon's common stock
(approximately 2.3 million equivalent shares of Common Stock). Shareholders'
equity increased $37.8 million resulting from the exercise of such options and
the related tax benefit.
In September 1994, Ideon acquired Wright Express. Ideon's former Chairman and
Chief Executive Officer, Paul G. Kahn, was a director of Wright Express prior to
its acquisition by Ideon. During negotiations between Ideon and Wright Express,
Mr. Kahn did not attend any meetings or participate in any discussions of the
Board of Directors of Wright Express and abstained from voting on the
acquisition by Ideon's Board of Directors.
-42-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note H--Transactions with Related Parties (continued)
SafeCard markets its CreditLine product pursuant to an agreement (as amended,
the "CreditLine Agreement") with CreditLine Corporation ("CLC"), a corporation
owned by Steven J. Halmos and Peter Halmos, and their families. The CreditLine
Agreement grants SafeCard an exclusive license to market CreditLine through
certain credit card issuers (including all issuers with which SafeCard has
contractual relationships) and provides that profits and losses, if any, are
shared equally between CLC and SafeCard. The CreditLine Agreement is the subject
of litigation as described in Note I.
Sierra
In July 1996, the Company acquired Sierra. The Company's Chairman and Chief
Executive Officer, Walter A. Forbes, was a director of Sierra prior to its
acquisition by the Company (the "Sierra Merger"). During negotiations between
the Company and Sierra, Mr. Forbes did not participate in any meetings or
deliberations of Sierra's Board of Directors with respect to the Sierra Merger
and abstained from the vote of the Board of Directors of the Company to approve
the Sierra Merger agreement.
Note I--Commitments and Contingencies
Rental expense under operating leases amounted to $39.6 million, $37.6 million
and $27.7 million for the years ended January 31, 1997, 1996 1995 and 1994, respectively.
NOTE G--COMMITMENTS AND CONTINGENCIES
Rental expense under operating leases amounted to $27.7 million, $24.2 million
and $21.7 million for the years ended January 31, 1996, 1995, and 1994,
respectively. These leases provide for normal escalation charges in addition to
the base rental. At January 31, 1996,1997, the minimum rental commitments under
non-cancellablenon-cancelable operating leases with initial or remaining terms of more than one
year aggregated $118.8$176.7 million ($24.8 million for 1997, $21.238.3 million for 1998, $18$31.7 million for 1999,
$14.6$25.7 million for 2000, $12.2$19.7 million for 2001, $14.8 million for 2002 and $28$46.5
million thereafter).
The Company has a Savings Incentive Plan ("Savings Plan") for all eligible
employees which qualifies as a 401(k) plan. Effective July 1, 1994,
Entertainment's Employee Stock Ownership Plan was merged into the Savings Plan. The Savings Plan provides that a
participant may contribute up to 15% of his or her annual salary, subject to
limitations, while the Company will contribute up to $61 per pay period for the
first $92 contributed by a participant. Davidson's 401(k) plan covers eligible
employees who elect to participate and Davidson has the discretion to make
contributions to this plan, which vest based on length of service. The Company's
contributions to the Savings Plan and Davidson's contributions to its 401(k)
plan for fiscal 1997, 1996 and 1995 and 1994 were
$3.7aggregated $5.6 million, $2.9$4.1 million and
$2$3.2 million, respectively.
NOTE H--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollar amountsIdeon
At January 31, 1997, Ideon was defending or prosecuting claims in thousands, except per common share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
Fiscal 1996
Total revenues $325,114 $347,759 $364,143 $377,948
Income before income taxes 59,047 67,029 71,821 68,446
Net income 36,046 41,692 43,021 42,615
Net income per common share .19 .21 .22 .22
Fiscal 1995
Total revenues $270,303 $288,143 $304,249 $320,201
Income before income taxes 45,876 48,922 53,342 53,645
Net income 27,969 29,948 33,211 33,438
Net income per common share .15 .16 .17 .18
-33-fifteen
complex lawsuits, twelve of which involved Peter Halmos, former Chairman of the
Board and Executive Management Consultant to SafeCard, and various parties
related to him as adversaries. Peter Halmos is also a plaintiff in three other
lawsuits, one against a former officer, one against a director of Ideon and one
against SafeCard's outside counsel, in which neither SafeCard nor Ideon have
been named as defendant. The fifteen cases in which Ideon or its subsidiaries is
a party to are as follows:
-43-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE H--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)Note I--Commitments and Contingencies (continued)
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former
lawyer for SafeCard) in April 1993 in Cook County Circuit Court in Illinois
against SafeCard and one of Ideon's directors, purporting to state claims
aggregating in excess of $100 million, principally relating to alleged rights to
"incentive compensation," stock options or their equivalent, indemnification,
wrongful termination and defamation. On February 7, 1995, the court dismissed
with prejudice Peter Halmos' claims regarding alleged rights to "incentive
compensation," stock options or their equivalent, wrongful termination and
defamation. Mr. Halmos has appealed this ruling. SafeCard has filed an answer to
the remaining indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declatory judgment action filed by Ideon in Delaware Chancery
Court.
A suit which seeks monetary damages and certain equitable relief filed by
SafeCard in August 1993 in Laramie County Circuit Court in Wyoming against Peter
Halmos and related entities alleging that Peter Halmos dominated and controlled
SafeCard, breached his fiduciary duties to SafeCard, and misappropriated
material non-public information to make $48 million in profits on sales of
SafeCard stock. In March 1994, Mr. Halmos and related entities filed a
counterclaim in which claims were made of conspiracy in restraint to trade,
monopolization and attempted monopolization, unfair competition and restraint of
trade, breach of contract for indemnity and intentional infliction of emotional
distress. SafeCard's motion to sever the conspiracy, monopolization and
restraint of trade claims was granted in May 1994. The claims for the
conspiracy, monopolization, restraint of trade and unfair competition were
dismissed without prejudice in June 1994. On April 12, 1995, the trial court
granted the motion of Mr. Halmos and certain related entities to amend their
counterclaims. The amended counterclaims include claims for indemnification for
legal expenses incurred in the action and a claim that SafeCard's contract with
CreditLine should be rescinded. On April 19, 1995, the trial court granted Mr.
Halmos' motion for summary judgment that certain of SafeCard's claims against
him were barred by the statute of limitation. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations. Pursuant to the Court's order
of July 31, 1996, the action has been abated to permit the parties to engage in
settlement negotiations.
A suit seeking monetary damages by Peter Halmos, purportedly in his name and in
the name of CreditLine Corporation and Continuity Marketing Corporation against
SafeCard, one of its officers and three of Ideon's directors in United States
District Court in the Southern District of Florida, in September 1994 purporting
to state various tort claims, state and federal antitrust claims and claims of
copyright infringement. The claims principally relate to the allegation by Peter
Halmos and his companies that SafeCard has taken action to prevent him from
being a successful competitor. All discovery in the case has been stayed pending
a ruling on a motion to dismiss filed by SafeCard, its officer and Ideon's
directors. On August 16, 1995, the United States Magistrate Judge filed a Report
and Recommendation that the case be dismissed. The parties have filed various
beliefs and memoranda in response to this Report. On January 4, 1996, the
Magistrate recommended ruling that the statute of limitations was tolled during
pendency of the case in federal court and the plaintiffs' state law claims were
thus not time-barred. Defendants have filed an objection to this recommendation.
-44-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit seeking monetary damages by Peter Halmos, as trustee for the Peter A.
Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc.
individually and certain other named parties on behalf of themselves and all
others similarly situated against SafeCard, one of its officers, one of its
former officers and three of Ideon's directors in the United States District
Court for the Southern District of Florida in December 1994. This litigation
involves claims by a putative class of sellers of SafeCard Stock for the period
January 11, 1993 through December 8, 1994 for alleged violations of the federal
and states securities laws in connection with alleged improprieties in
SafeCards' investor relations program. The complaint also includes individual
claims made by Peter Halmos in connection with the sale of stock by two trusts
controlled by him. SafeCard and the individual defendants have filed a motion to
dismiss. There has been limited discovery on class certification and
identification of "John Doe" defendant issues. Ideon filed its opposition to the
pending motion for class certification on December 11, 1995. Plaintiffs' reply
was filed March 19, 1996. On September 9, 1996, the Court entered an order
abating the action until December 9, 1996 to permit the parties to engage in
settlement negotiations. The parties filed a joint status report on December 10,
1996 requesting an order abating the action until January 24, 1997 to permit
further settlement discussions. On February 11, 1997, the Court entered an order
abating the stay and setting the case for trial beginning September 2, 1997.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos, in the
State Circuit Court in Palm Beach County, Florida in April 1995 against Ideon,
Family Protection Network, Inc., SafeCard, one of Ideon's directors and Ideon's
Chief Executive Officer purporting to state various statutory and tort claims.
The claims principally relate to the allegation by these companies that
SafeCard's Early Warnings Service and Family Protection Network were conceived
and commercialized by, among others, Peter Halmos and have been improperly
copied. An amended complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answer.
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of himself
and all others similarly situated against Ideon, SafeCard, each of the members
of Ideon's Board of Directors, three non-board member officers of Ideon, Ideon's
previous outside auditor and one of Ideon's outside counsel in the United States
District Court for the Southern District of Florida in June 1995. The litigation
involves claims by a putative class of purchasers of Ideon stock between
December 14, 1994 and May 25, 1995 and on behalf of a separate class of all
record holders of SafeCard stock as of April 27, 1995. The putative class claims
are for alleged violations of the federal securities laws, for alleged breach of
fiduciary duty and alleged negligence in connection with certain matters voted
on at the Annual Meeting of SafeCard stockholders held on April 27, 1995. Ideon
and the individual defendants have filed a motion to dismiss these claims. There
has been limited discovery on class certification issues. Ideon filed its
opposition to the pending motion for class certification on December 11, 1995.
Plaintiffs' reply was filed March 19, 1996. On September 9, 1996, the Court
entered an order abating the action until December 9, 1996 to permit the parties
to engage in settlement negotiations. On December 5, 1996, plaintiffs filed a
motion for leave to file an amended complaint, name additional parties
(previously named as "John Does") and include additional legal claims. The
amended complaint is a purported buyer and class action under the securities and
racketeering laws alleging Ideon and others engaged in a stock manipulation
scheme to artificially inflate the price of SafeCard/Ideon stock between January
1993 and December 1995. On February 11, 1997, the Court entered an order abating
the stay and setting this case for trial beginning on September 2, 1997. On
February 27, 1997, the Company filed a response in opposition to plaintiffs'
motion for leave to file an amended complaint.
-45-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A purported shareholder derivative action initiated by Michael P. Pisano, on
behalf of himself and other stockholders of SafeCard and Ideon against SafeCard,
Ideon, two of their officers, and Ideon's directors in United States District
Court, Southern District of Florida. This litigation involves claims that the
officers and directors of SafeCard have improperly refused to accede Peter
Halmos' litigation and indemnification demands against Ideon. Ideon and the
individual defendants have filed motions to dismiss the first amended complaint.
On September 29, 1995, Pisano filed a second amended complaint which made
additional allegations of waste and mismanagement against Ideon's officers and
directors in connection with the Family Protection Network and PGA Tour Partner
products. On December 26, 1995, Ideon filed motions to dismiss the Second
Amended Complaint. On June 4 and June 19, 1996, orders were entered dismissing
plaintiff's claims with prejudice for failure to join an indispensable party,
Peter Halmos. On June 27, 1996, plaintiff filed a notice of appeal. Plaintiff
filed initial and reply briefs and Ideon filed an answer brief. Oral agreement
on the appeal is scheduled for April 10, 1997.
A suit seeking monetary damages filed by Peter Halmos against SafeCard, one of
its directors, its former general counsel, and its legal counsel in the Circuit
Court, Fifteenth Judicial Circuit, in and for Palm Beach County, Florida on
August 10, 1995. This litigation involves claims by Peter Halmos for breach of
fiduciary duty and constructive fraud, fraud, and negligent misrepresentation
and is based on allegations arising out of the resolution of a shareholder class
action lawsuit in 1991 and SafeCard's subsequent filing of an action against
Halmos and his related companies in Wyoming in 1993. Plaintiff filed an amended
complaint on June 26, 1996 and on July 11, 1996 Ideon moved to dismiss
plaintiff's amended complaint or in the alternative to stay the action.
A declaratory judgment action by Ideon and its directors against Peter Halmos in
Delaware Chancery Court, New Castle County. This action seeks a declaration
regarding Ideon's advance indemnification obligations, if any, to Peter Halmos
in connection with his many lawsuits. Halmos filed a motion to dismiss on
jurisdictional grounds on November 17, 1995. Ideon filed a brief in opposition
and an amended complaint on February 14, 1996. On April 22, 1996, Halmos filed
an answer and amended counterclaims in which High Plains Capital Corporation
("High Plains") and Halmos Trading & Investment Company ("Halmos Trading") were
added as additional parties. The amended counterclaims seek advancement and/or
indemnification for Halmos, High Plains and Halmos Trading for certain
litigations and an IRS investigation. The amended counterclaims also seek
recovery against individual defendant directors based on allegations they
willfully and unjustly denied Halmos indemnification and/or advancement. Ideon
filed an answer and affirmative defenses to the amended counterclaims on May 6,
1996.
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum merit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling on
this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
-46-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company filed its answer on September 30, 1996.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court for
the Southern District of New York. The litigation involves claims against Ideon,
its former CEO and its Vice President of Investor Relations for alleged material
misrepresentations and omissions in connection with announcements relating to
Ideon's expected earnings per share in 1995 and its new product sales, which
included the PGA Tour Card Program, Family Protection Network and Collections of
the Vatican Museums. On July 15, 1996, Ideon filed a motion to dismiss. The
Company withdrew its motion to dismiss and answered the complaint on December 5,
1996.
As noted in Note B, the Company established a reserve upon the consummation of
the Ideon Merger related, in part, to these litigation matters. The Company is
also involved in certain other claims and litigation arising in the ordinary
course of business, which are not considered material to the financial position,
operations or cash flows of the Company.
Note J--Costs Related to Products Abandoned and Restructuring - Ideon
Included in costs related to products abandoned and restructuring in the
Consolidated Statement of Income for the year ended January 31, 1996, were
special charges totaling $43.8 million, net of recoveries, related to the
abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure as discussed below. The original
charge of $45.0 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995 Ideon recovered $1.2 million
of a $3.9 million deposit included in the above charges. Also included in costs
related to products abandoned and restructuring are marketing and operational
costs incurred for products abandoned of $53.2 million. During the year ended
January 31, 1997, all remaining amounts that had been previously accrued were
paid.
-47-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note J--Costs Related to Products Abandoned and Restructuring - Ideon
(continued)
During fiscal 1996, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA TOUR
Partners program that provided various benefits to members. Consumer response
rates after the launch were significantly less than Ideon management's
expectations, the product as configured was deemed not economically viable and a
charge of $18 million was incurred associated with the abandonment of the
product marketing including employee severance payments (approximately 130
employees), costs to terminate equipment and facilities leases, costs for
contract impairments and write-downs taken for asset impairments. In September
1995, after a period of product redesign and test marketing, Ideon discontinued
its PGA TOUR Partners credit card servicing role and recorded a charge of $3.6
million for costs associated with the abandonment of this role, including
employee severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments. In
April 1995, Ideon launched a nationwide child registration and missing child
search program. Consumer response rates after the launch were significantly less
than Ideon management's expectations and a charge of $9 million was incurred to
cover severance payments (approximately 100 employees), costs to terminate
equipment and facilities leases and write-down taken for asset impairments. As a
result of the discontinuance of these products, Ideon undertook an overall
restructuring of its operations and incurred charges of $7.2 million to
terminate operating leases and write-down assets to realizable value, $3.0
million for restructuring its SafeCard division and $4.2 million for
restructuring its corporate infrastructure.
During fiscal 1995, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior management
team, resulting in $7.9 million of charges for various severance agreements and
a lease termination.
Note K--Sale of The ImagiNation Network - Sierra
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993,
Sierra sold 42% of INN's voting stock and reduced its ownership interest to 58%
and reduced its voting control such that Sierra recorded its liquidation
preference in excess of recorded book value as shareholders' equity.
In December 1994, Sierra sold its remaining equity interest in INN to AT&T and
recorded a gain of $19.7 million. Sierra also entered into a multi-year
publishing agreement with AT&T to provide content for INN. The publishing
agreement provides for AT&T to fund up to $4 million of Sierra's development
expenditures under an existing publishing agreement and up to $23 million of
Sierra's development expenditures, subject to certain limitations, through
non-refundable royalty advances. The non-refundable royalty advances are
reflected net of research and development expense.
-48-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note L--Business Segments
Business segment data consists of the following at or for the years ended
January 31 (in thousands):
1997 1996 1995
------------------------------------------
Revenues:
Membership services $1,972,430 $1,643,242 $1,363,561
Software 375,225 291,990 191,050
------------------------------------------
$2,347,655 $1,935,232 $1,554,611
==========================================
Operating Profit:
Membership services $ 245,453 $ 184,699 $ 218,145
Software 21,239 40,928 30,849
------------------------------------------
$ 266,692 $ 225,627 $ 248,994
==========================================
Identifiable Assets:
Membership services $2,268,604 $1,803,577 $1,566,186
Software 204,768 264,619 205,936
------------------------------------------
$2,473,372 $2,068,196 $1,772,122
==========================================
Capital Expenditures:
Membership services $ 34,312 $ 53,048 $ 29,809
Software 25,353 10,100 9,752
------------------------------------------
$ 59,665 $ 63,148 $ 39,561
==========================================
Depreciation and Amortization:
Membership services $ 49,450 $ 40,358 $ 27,683
Software 9,208 9,378 15,780
------------------------------------------
$ 58,658 $ 49,736 $ 43,463
==========================================
Operating profit consists of revenues less operating expenses excluding interest
income, net and includes merger, integration, restructuring and litigation
charges of $131.3 million and $48.6 million for membership services and
software, respectively, for the fiscal year ended January 31, 1997 (see Note B).
Fiscal 1996 membership services includes $97.0 million of costs related to Ideon
products abandoned and restructuring. Fiscal 1995 includes $7.9 million of costs
related to Ideon products abandoned and restructuring and a $17.7 million gain
on sale of INN, net for membership services and software, respectively (see
Notes J and K).
Note M--Subsequent Event
On February 11, 1997, the Company issued $550 million in principal amount of 3%
convertible subordinated notes (the "3% Notes") due February 15, 2002. Interest
on the 3% Notes is payable semi-annually on February 15 and August 15 of each
year, commencing August 15, 1997. Each $1,000 principal amount of 3% Notes is
convertible into 32.6531 shares of Common Stock subject to adjustment in certain
events. The 3% Notes may be redeemed at the option of the Company at any time on
or after February 15, 2000, in whole or in part, at the redemption prices (as
defined in the Indenture governing the 3% Notes) plus accrued interest to the
redemption date. The 3% Notes will be subordinated in right of payment to all
existing and future Senior Debt (as defined in the Indenture governing the 3%
Notes) of the Company. Issuance costs are being amortized on a straight-line
basis over five years.
-49-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Note N--Quarterly Results of Operations (unaudited)
(Dollar amounts in thousands, except per common share amounts)
The quarterly results of operations have been restated to reflect the
poolings-of-interests transactions with Getko, NAOGthe Fiscal 1997 Pooled Entities
discussed in Note B.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------
Fiscal 1997
Total revenues $515,479 $555,744 $602,203 $674,229
Income (loss) before income taxes 84,124 77,217 (31,829) 146,729
Net income (loss) 52,121 40,461 (18,009) 89,526
Net income (loss) per common share .13 .10 (.04) .22
Fiscal 1996
Total revenues $430,659 $466,048 $492,556 $545,969
Income (loss) before income taxes 62,270 (1,756) 71,989 102,809
Net income (loss) 38,304 (2,368) 43,399 65,640
Net income (loss) per common share .15 (.01) .16 .25
The second quarter of fiscal 1997 includes $28.6 million ($25.1 million or $.06
per common share after-tax effect) of merger costs related to the completion of
the Davidson and Advance Ross (see Note B).Sierra acquisitions. The third quarter of fiscal 1997 includes
$147.2 million ($89.6 million or $.22 per common share after-tax effect) of
merger costs principally related to the completion of the Ideon acquisition. The
fourth quarter of fiscal 1997 includes $4.1 million which primarily represents
investment banking fees directly related to the acquisitions of Plextel and KA.
The fourth quarter of fiscal 1996 includes $5.2 million ($4.2 million or $.02$.01
per common share after-tax effect) of merger costs incurred in connection with
the acquisition of Advance Ross. NOTE I--SUBSEQUENT EVENTS
During February 1996, the Company entered into two separate AgreementsThe first, second, third and Plans
of Merger to acquire Davidson & Associates, Inc. ("Davidson") and Sierra
On-Line, Inc. ("Sierra") (collectively, the "Proposed Mergers"). Under the terms
of the respective agreements, the Company plans to issue .85 of one share of its
Common Stock for each share of Davidson common stock issued and outstanding and
1.225 shares of its Common Stock for each share of Sierra common stock issued
and outstanding, immediately prior to the respective effective dates of the
Proposed Mergers. The consummations of the Proposed Mergers are subject to
certain customary closing conditions, including the approval of the holders of
Davidson and Sierra common stock, respectively. Additionally, the Boards of
Directors of Davidson and Sierra have the right (but are not required) to
terminate the respective merger agreements if the average price per share of the
Company's Common Stock in specified periods prior to their respective
stockholders' meetings is below $29. Neither transaction is contingent upon the
consummation of the other transaction. The transactions will be accounted for
under the pooling-of-interests method of accounting and are expected to be
completed during the second quarterfourth quarters of
fiscal 1997.
NOTE J--EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
During April 1996 the Company entered into an Agreementinclude $8.1 million, $73.1 million, $16.4 million and Plan($.6
million), respectively, of Merger to
acquire Ideon Group, Inc. (the "Ideon Merger"). In the Ideon Merger, each share
of Ideon Group, Inc. ("Ideon") common stock outstanding on the effective date of
the Ideon Merger will be converted into Common Stock with a value of $13.50 per
share, subject to certain adjustments if the average stock price of a share of
Common Stock falls outside of a specified range. The consummation of the Ideon
Merger is subject to certain customary closing conditions, including the
approval of the holders of Ideon common stock. The Company expects upon closing
of the Ideon Merger to reserve forIdeon's costs to be incurred related to the Ideon
Merger, which will include integrationproducts abandoned and
transaction costs as well as costs
relating to certain outstanding litigation matters previously discussed in
Ideon's public filings. This transaction will be accounted for under the
pooling-of-interests method of accounting and is expected to be completed during
the second or third quarter of fiscal 1997.
-34-restructuring.
-50-
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
-35--51-
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the sections
titled "Proposal 1: Election of Directors" and "Directors and Executive
Officers" is incorporated herein by reference in response to this item.
ITEM 11.
EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the section
titled "Executive Compensation and Other Information" is incorporated herein by
reference in response to this item, except that the information contained in the
Proxy Statement under the sub-headings "Compensation Committee Report on
Executive Compensation and "Performance Graph" is not incorporated herein by
reference and is not to be deemed "filed" as part of this filing.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Proxy Statement under the section
titled "Security Ownership of Management and Certain Beneficial Owners" is
incorporated herein by reference in response to this item.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-36-The information contained in the Company's Proxy Statement under the section
titled "Executive Compensation and Other Information - Certain Relationships and
Related Transactions" is incorporated herein by reference in response to this
item.
-52-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) The following consolidated financial statements of CUC International
Inc. are filed under "Item 8. Financial Statements and Supplementary
Data":
Consolidated balance sheets--January 31, 19961997 and 19951996
Consolidated statements of income--Years ended January 31, 1997, 1996
1995
and 19941995
Consolidated statements of shareholders' equity--Years ended January
31, 1997, 1996 1995 and 19941995
Consolidated statements of cash flows--Years ended January 31, 1997,
1996 1995 and 19941995
Notes to consolidated financial statements
(a) (2)
and (d) The following consolidated financial statement schedule of CUC
and (d)
International Inc. is included in Item 14(d):
Schedule II--Valuation and qualifying accounts--Years ended January 31,
1997, 1996 1995 and 19941995
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, or are inapplicable, and
therefore have been omitted.
(b) Reports on Form 8-K
None.(1) Current Report on Form 8-K, filed on January 22, 1997, reporting an
Item 5 ("Other Events") event.
(2) Current Report on Form 8-K, filed on January 31, 1997, reporting an
Item 5 ("Other Events") event.
(a) (3)
and (c) Exhibits:
Exhibit No. Description
- --------------------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company,
as filed November 21, 1991, as amended June 25, 1992, and as amended June
7, 19955, 1996 (filed as Exhibit 3.1 to Company's Form
10-Q for the period ended April 30, 1995)1996).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.2 FormIndenture dated as of Zero Coupon Convertible Subordinated DebenturesFebruary 11, 1997, between CUC
International Inc. and Trust
Indenture between the Company and Morgan Guaranty Trust Company
of New York,Marine Midland Bank, as Trusteetrustee (filed as
Exhibit 4(a) to the Company's Current Report on Form 8-K dated June 3, 1989)filed February
13, 1997).*
-37--53-
Exhibit No. Description
- ----------- -----------
10.1-10.16 Management Contracts, Compensatory Plans and Arrangements
---------------------------------------------------------
10.1 Form of Employment Contract with E. Kirk Shelton and Christopher
K. McLeod, dated February 1, 1987, as amended November 1, 1991
(filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended January 31, 1994)Exhibit No. Description
- ----------- -----------
10.1-10.22 Management Contracts, Compensatory Plans and Arrangements
10.1 Agreement with E. Kirk Shelton, dated as of May 15, 1996 (filed
as Exhibit 10.1 to the Company's Form 10-Q for the period ended
July 31, 1996.)*
10.2 Agreement with Christopher K. McLeod, dated as of May 15, 1996
(filed as Exhibit 10.2 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.3 Amended and Restated Employment Contract with Walter A. Forbes,
dated as of May 15, 1996 (filed as Exhibit 10.3 to the Company's
Form 10-Q for the period ended July 31, 1996).*
10.2 Amendment to Employment Contract with E. Kirk Shelton, dated
February 1, 1996.
10.3 Amendment to Employment Contract with Christopher K. McLeod,
dated February 1, 1996.
10.4 Employment Contract with Walter A. Forbes, dated January 1, 1987,
as amended January 1, 1991, January 1, 1993 and October 1, 1993
(filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended January 31, 1994) (the "Forbes Employment
Agreement").*
10.5 Fourth Amendment to Forbes Employment Agreement, dated as of June
1, 1994 (filed as Exhibit 10.3 to the Company's Form 10-Q for the
period ended July 31, 1994).*
10.6 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
10.7 Amendment to Agreement with Cosmo Corigliano, dated February 21,
1996.
10.8 Agreement with Amy N. Lipton, dated February 1, 1996.
10.9 Form of Employee Stock Option under the 1987 Stock Option Plan
(filed as Exhibit 10.6 to the Company's Form 10-Q for the period
ended April 30, 1995).*
10.10 Form of Director Stock Option for 1990 and 1992 Directors Stock
Option Plans (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1991,
as amended December 12, 1991 and December 19, 1991).*
10.11 Form of Director Stock Option for 1994 Directors Stock Option
Plan (filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1995).*
10.12 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.13 1990 Directors Stock Option Plan, as amended (filed as Exhibit
10.10 to the Company's Form 10-Q for the period ended April 30,
1995).*
10.14 1992 Directors Stock Option Plan, as amended (filed as Exhibit
10.11 to the Company's Form 10-Q for the period ended April 30,
1995).*
10.15 1994 Directors Stock Option Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
-38-10.5 Amendment to Agreement with Cosmo Corigliano, dated February 21,
1996 (filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1996).*
10.6 Amendment to Agreement with Cosmo Corigliano, dated January 1,
1997.
10.7 Agreement with Amy N. Lipton, dated February 1, 1996 (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996).*
10.8 Amendment to Agreement with Amy N. Lipton, dated January 1, 1997.
10.9 Employment Agreement with Robert M. Davidson, dated July 24, 1996
(filed as Exhibit 10.7 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.10 Employment Agreement with Janice G. Davidson, dated July 24, 1996
(filed as Exhibit 10.8 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.11 Non-Competition Agreement with Robert M. Davidson, dated July 24,
1996 (filed as Exhibit 10.9 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.12 Non-Competition Agreement with Janice G. Davidson, dated July 24,
1996 (filed as Exhibit 10.10 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.13 Employment Agreement with Kenneth A. Williams, dated July 24,
1996 (filed as Exhibit 10.11 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.14 Non-Competition Agreement with Kenneth A. Williams, dated July
24, 1996 (filed as Exhibit 10.12 to the Company's Form 10-Q for
the period ended July 31, 1996).*
10.15 Form of Employee Stock Option under the 1987 Stock Option Plan,
as amended (filed as Exhibit 10.13 to the Company's Form 10-Q for
the period ended October 31, 1996).*.
10.16 Form of Director Stock Option for 1990 and 1992 Directors Stock
Option Plans (filed as Exhibit 10.4 to the Company's Annual
Report for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
-54-
Exhibit No. Description
- ----------Exhibit No. Description
- ----------- -----------
10.16 Restricted Stock Plan and Form of Restricted Stock Plan Agreement
(filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
10.17 Form of Director Stock Option for 1994 Directors Stock Option
Plan, as amended (filed as Exhibit 10.15 to the Company's Form
10-Q for the period ended October 31, 1996).*
10.18 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the
Company's Form 10-Q for the period ended October 31, 1996).*
10.19 1990 Directors Stock Option Plan, as amended (filed as Exhibit
10.17 to the Company's Form 10-Q for the period ended October 31,
1996).*
10.20 1992 Directors Stock Option Plan, as amended (filed as Exhibit
10.18 to the Company's Form 10-Q for the period ended October 31,
1996).*
10.21 1994 Directors Stock Option Plan, as amended (filed as Exhibit
10.19 to the Company's Form 10-Q for the period ended October 31,
1996).*
10.22 Restricted Stock Plan and Form of Restricted Stock Plan Agreement
(filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
10.23 Credit Agreement, dated as of March 26, 1996, among: CUC
International Inc.; the Banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and The Sakura Bank, Limited as Co-Agents;
and The Chase Manhattan Bank, N.A. as Administrative Agent.
10.18 Agreement and Plan of Merger, dated October 17, 1995, among CUC
International Inc., Retreat Acquisition Corporation and Advance
Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No. 33-64801,
filed on December 7, 1995).*
10.19 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Davidson & Associates, Inc., CUC International Inc. and
Stealth Acquisition I Corp. (filed as Exhibit 2(a) to the
Company's Report on Form 8-K filed March 12, 1996).*
10.20 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Sierra On-Line, Inc., CUC International Inc. and Larry
Acquisition Corp. (filed as Exhibit 2(b) to the Company's Report
on Form 8-K filed March 12, 1996).*
10.21 Agreement and Plan of Merger, dated as of April 19, 1996, by and
among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp.
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
- ------------------------
* Incorporated by reference
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CUC International Inc.
----------------------------------------------------
(Registrant)
By /s/ Walter A. Forbes
----------------------------------------------------
Walter A. Forbes
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 10, 1996, among: CUC
International Inc.; the Banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and The Sakura Bank, Limited as Co-Agents;
and The Chase Manhattan Bank, N.A. as Administrative Agent (filed
as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1996).*
10.24 Agreement and Plan of Merger, dated October 17, 1995, among CUC
International Inc., Retreat Acquisition Corporation and Advance
Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No. 33-64801,
filed on December 7, 1995).*
10.25 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Davidson & Associates, Inc., CUC International Inc. and
Stealth Acquisition I Corp. (filed as Exhibit 2(a) to the
Company's Report on Form 8-K filed March 12, 1996).*
10.26 Amendment No. 1 dated as of July 24, 1996, among Davidson &
Associates, Inc., CUC International Inc. and Stealth Acquisition
I Corp. (filed as Exhibit 2.2 to the Company's Report on Form 8-K
filed August 5, 1996).*
10.27 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Sierra On-Line, Inc., CUC International Inc. and Larry
Acquisition Corp. (filed as Exhibit 2(b) to the Company's Report
on Form 8-K filed March 12, 1996).*
10.28 Amendment No. 1 dated as of March 27, 1996, among Sierra On-Line,
Inc., CUC International Inc. and Larry Acquisition Corp. (filed
as Exhibit 2.4 to the Company's Report on Form 8-K filed August
5, 1996).*
10.29 Amendment No. 2 dated as of July 24, 1996, among Sierra On-Line,
Inc., CUC International Inc. and Larry Acquisition Corp. (filed
as Exhibit 2.5 to the Company's Report on Form 8-K filed August
5, 1996).*
-55-
Exhibit No. Description
- ----------- -----------
10.30 Registration Rights Agreement dated July 24, 1996, among CUC
International Inc. and the other parties signatory thereto (filed
as Exhibit 10.1 to the Company's Report on Form 8-K filed August
5, 1996).*
10.31 Agreement of Sale dated July 23, 1996, between Robert M. Davidson
and Janice G. Davidson and CUC Real Estate Holdings, Inc. (filed
as Exhibit 10.2 to the Company's Report on Form 8-K filed August
5, 1996).*
10.32 Agreement and Plan of Merger, dated as of April 19, 1996, by and
among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp. (filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1996).*
10.33 Form of U.S. Underwriting Agreement dated October 1996, among CUC
International Inc., certain selling stockholders and the U.S.
Underwriters (filed as Exhibit 1.1 (a) to the Company's
Registration Statement on Form S-3, Registration No. 333-13537,
filed on October 9, 1996).*
10.34 Form of International Underwriting Agreement dated October 1996,
among CUC International Inc., certain selling stockholders and
the International Underwriters (filed as Exhibit 1.1 (b) to the
Company's Registration Statement on Form S-3, Registration No.
333-13537, filed on October 9, 1996).*
10.35 Registration Rights Agreement dated as of February 11, 1997,
between CUC International Inc. and Goldman, Sachs & Co. (for
itself and on behalf of the other purchasers party thereto)
(filed as Exhibit 4(b) to the Company's Report on Form 8-K filed
February 13, 1997).*
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
* Incorporated by reference
-56-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CUC International Inc.
-------------------------------------
(Registrant)
By /s/ Walter A. Forbes
-------------------------------------
Walter A. Forbes
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
by /s/ Walter A. Forbes Chief Executive Officer and
-------------------------------------- Chairman of the Board
(Walter A. Forbes) (Principal Executive Officer) April 10, 1996
by /s/ Cosmo Corigliano Senior Vice President and
-------------------------------------- Chief Financial Officer
(Cosmo Corigliano) (Principal Financial and Accounting Officer) April 10, 1996
by /s/ Bartlett Burnap Director April 10, 1996
--------------------------------------
(Bartlett Burnap)
by /s/ T. Barnes Donnelley Director April 10, 1996
--------------------------------------
(T. Barnes Donnelley)
by /s/ Stephen A. Greyser Director April 10, 1996
--------------------------------------
(Stephen A. Greyser)
by /s/ Christopher K. McLeod Director April 10, 1996
--------------------------------------
(Christopher K. McLeod)
by /s/ Burton C. Perfit Director April 10, 1996
--------------------------------------
(Burton C. Perfit)
by /s/ Robert P. Rittereiser Director April 10, 1996
--------------------------------------
(Robert P. Rittereiser)
by /s/ Stanley M. Rumbough, Jr. Director April 10, 1996
--------------------------------------
(Stanley M. Rumbough, Jr.)
by /s/ E. Kirk Shelton Director April 10, 1996
--------------------------------------
(E. Kirk Shelton)
-40-Signature Title Date
--------- ----- ----
by /s/ Walter A. Forbes Chief Executive Officer and
--------------------------- Chairman of the Board
(Walter A. Forbes) (Principal Executive Officer) April 28, 1997
by /s/ Cosmo Corigliano Senior Vice President and
--------------------------- Chief Financial Officer
(Cosmo Corigliano) (Principal Financial and April 28, 1997
Accounting Officer)
by /s/ Bartlett Burnap Director April 28, 1997
---------------------------
(Bartlett Burnap)
by /s/ T. Barnes Donnelley Director April 28, 1997
---------------------------
(T. Barnes Donnelley)
by /s/ Stephen A. Greyser Director April 28, 1997
---------------------------
(Stephen A. Greyser)
by /s/ Christopher K. McLeod Director April 28, 1997
---------------------------
(Christopher K. McLeod)
by /s/ Burton C. Perfit Director April 28, 1997
---------------------------
(Burton C. Perfit)
by /s/ Robert P. Rittereiser Director April 28, 1997
---------------------------
(Robert P. Rittereiser)
-57-
SIGNATURES (continued)
Signature Title Date
--------- ----- ----
by /s/ Stanley M. Rumbough, Jr. Director April 28, 1997
---------------------------
(Stanley M. Rumbough, Jr.)
by /s/ E. Kirk Shelton Director April 28, 1997
---------------------------
(E. Kirk Shelton)
by /s/ Kenneth A. Williams Director April 28, 1997
---------------------------
(Kenneth A. Williams)
-58-
CUC International Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------------------------------------
Balance at Charged Charged to
Beginning to Costs Other Accounts Deductions Balance at
Description of Period and Expenses --Describe --Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARYYear ended January 31, 1997:
Allowance for doubtful accounts $39,051,000 $117,854,000 $ 7,961,000 (A) $109,641,000 (B) $55,225,000 (E)
Allowance for membership
cancellations 36,983,000 398,750,000 (C) 401,195,000 (D) 34,538,000 (F)
Year ended January 31, 1996:
Allowance for doubtful accounts $10,548,000 $22,980,000 $ 105,00024,113,000 55,155,000 195,000 (A) $22,928,00040,412,000 (B) $10,705,00039,051,000 (E)
Allowance for membership
27,412,000 335,359,000cancellations 36,609,000 (G) 376,180,000 (C) 335,336,000375,806,000 (D) 27,435,00036,983,000 (F)
cancellations
YEAR ENDED JANUARYYear ended January 31, 1995:
Allowance for doubtful accounts 5,117,000 21,250,000 122,00012,940,000 46,273,000 1,260,000 (A) 15,941,00036,360,000 (B) 10,548,00024,113,000 (E)
Allowance for membership
cancellations 24,353,000 317,686,00033,246,000 355,496,000 (C) 314,627,000353,674,000 (D) 27,412,000 (F)
YEAR ENDED JANUARY 31, 1994:
Allowance for doubtful accounts 5,370,000 11,615,000 11,868,000 (B) 5,117,000 (E)
Allowance for membership
cancellations 21,330,000 288,289,000 (C) 285,266,000 (D) 24,353,00035,068,000 (F)
(A) Pre-acquisition balance of subsidiary purchased during fiscal year
(B) Uncollectible accounts written off
(C) Charged to balance sheet account "Deferred Membership Income"
(D) Charges for refunds upon membership cancellations
(E) Deducted from balance sheet account "Receivables"
(F) Included in accrued expenses
(G) Includes activity related to the Ideon Transition Period of $9,327,000
charged to other accounts and $7,786,000 of deductions.
-59-
INDEX TO EXHIBITS
Exhibit No. Description Page
- 41----------- ----------- ----
3.1 Amended and Restated Certificate of Incorporation of the Company,
as filed June 5, 1996 (filed as Exhibit 3.1 to the Company's Form
10-Q for the period ended April 30, 1996).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee (filed as
Exhibit 4(a) to the Company's Report on Form 8-K filed February
13, 1997).*
10.1-10.22 Management Contracts, Compensatory Plans and Arrangements
10.1 Agreement with E. Kirk Shelton, dated as of May 15, 1996 (filed
as Exhibit 10.1 to the Company's Form 10-Q for the period ended
July 31, 1996.)*
10.2 Agreement with Christopher K. McLeod, dated as of May 15, 1996
(filed as Exhibit 10.2 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.3 Amended and Restated Employment Contract with Walter A. Forbes,
dated as of May 15, 1996 (filed as Exhibit 10.3 to the Company's
Form 10-Q for the period ended July 31, 1996).*
10.4 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
10.5 Amendment to Agreement with Cosmo Corigliano, dated February 21,
1996 (filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1996).*
10.6 Amendment to Agreement with Cosmo Corigliano, dated January 1,
1997.
10.7 Agreement with Amy N. Lipton, dated February 1, 1996 (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996).*
10.8 Amendment to Agreement with Amy N. Lipton, dated January 1, 1997.
-60-
INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
- ----------- ----------- ----
10.9 Employment Agreement with Robert M. Davidson, dated July 24, 1996
(filed as Exhibit 10.7 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.10 Employment Agreement with Janice G. Davidson, dated July 24, 1996
(filed as Exhibit 10.8 to the Company's Form 10-Q for the period
ended July 31, 1996).*
10.11 Non-Competition Agreement with Robert M. Davidson, dated July 24,
1996 (filed as Exhibit 10.9 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.12 Non-Competition Agreement with Janice G. Davidson, dated July 24,
1996 (filed as Exhibit 10.10 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.13 Employment Agreement with Kenneth A. Williams, dated July 24,
1996 (filed as Exhibit 10.11 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.14 Non-Competition Agreement with Kenneth A. Williams, dated July
24, 1996 (filed as Exhibit 10.12 to the Company's Form 10-Q for
the period ended July 31, 1996).*
10.15 Form of Employee Stock Option under the 1987 Stock Option Plan,
as amended (filed as Exhibit 10.13 to the Company's Form 10-Q for
the period ended October 31, 1996).*
10.16 Form of Director Stock Option for 1990 and 1992 Directors Stock
Option Plans (filed as Exhibit 10.4 to the Company's Annual
Report for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
10.17 Form of Director Stock Option for 1994 Directors Stock Option
Plan, as amended (filed as Exhibit 10.15 to the Company's Form
10-Q for the period ended October 31, 1996).*
10.18 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the
Company's Form 10-Q for the period ended October 31, 1996).*
10.19 1990 Directors Stock Option Plan, as amended (filed as Exhibit
10.17 to the Company's Form 10-Q for the period ended October 31,
1996).*
10.20 1992 Directors Stock Option Plan, as amended (filed as Exhibit
10.18 to the Company's Form 10-Q for the period ended October 31,
1996).*
-61-
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Company, as
filed November 21, 1991, as amended June 25, 1992, and as
amended June 7, 1995 (filed as Exhibit 3.1 to the Company's
Form 10-Q for the period ended April 30, 1995).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement,
No. 33-44453, on Form S-4 dated December 19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 33-44453, on Form S-4 dated December 19, 1991).*
4.2 Form of Zero Coupon Convertible Subordinated Debentures and Trust Indenture between
the Company and Morgan Guaranty Trust Company of New York, as Trustee (filed as
Exhibit 4(a) to the Company's Current Report on Form 8-K, dated June 3, 1989).*
10.1-10.16 Management Contracts, Compensatory Plans and Arrangements
---------------------------------------------------------
10.1 Form of Employment Contract with E. Kirk Shelton and Christopher K. McLeod, dated
February 1, 1987, as amended November 1, 1991 (filed as Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended January 31, 1994).*
10.2 Amendment to Employment Contract with E. Kirk Shelton, dated February 1, 1996.
10.3 Amendment to Employment Contract with Christopher K. McLeod, dated February 1,
1996.
10.4 Employment Contract with Walter A. Forbes, dated January 1, 1987, as amended
January 1, 1991, January 1, 1993 and October 1, 1993 (filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended January 31, 1994) (the
"Forbes Employment Agreement").*
10.5 Fourth Amendment to Forbes Employment Agreement, dated as
of June 1, 1994 (filed as Exhibit 10.3 to the Company's
Form 10-Q for the period ended July 31, 1994).*
10.6 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year ended January 31,
1995).*
10.7 Amendment to Agreement with Cosmo Corigliano, dated February 21, 1996.
-42-
INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
---------- ----------- ----
10.8 Agreement with Amy N. Lipton, dated February 1, 1996.
10.9 Form of Employee Stock Option under the 1987 Stock Option Plan (filed as Exhibit
10.6 to the Company's Form 10-Q for the period ended April 30, 1995).*
10.10 Form of Director Stock Option for 1990 and 1992 Directors
Stock Option Plans (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1991, as amended December 12, 1991 and
December 19, 1991).*
10.11 Form of Director Stock Option for 1994 Directors Stock Option Plan (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1995).*
10.12 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the Company's Form
10-Q for the period ended April 30, 1995).*
10.13 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.10 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.14 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.11 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.15 1994 Directors Stock Option Plan (filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
10.16INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
- ----------- ----------- ----
10.21 1994 Directors Stock Option Plan, as amended (filed as Exhibit
10.19 to the Company's Form 10-Q for the period ended October 31,
1996).*
10.22 Restricted Stock Plan and Form of Restricted Stock Plan Agreement
(filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
10.23 Credit Agreement, dated as of March 26, 1996, among: CUC
International Inc.; the Banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and The Sakura Bank, Limited as Co-Agents;
and The Chase Manhattan Bank, N.A. as Administrative Agent (filed
as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1996).*
10.24 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).*
10.17 Credit Agreement, dated as of March 26, 1996, among: CUC International Inc.; the Banks
signatory thereto; The Chase Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty
Trust Company of New York, and The Sakura Bank, Limited as Co-Agents; and The Chase
Manhattan Bank, N.A. as Administrative Agent.
10.18 Agreement and Plan of Merger, dated October 17, 1995, among CUC
International Inc., Retreat Acquisition Corporation and Advance
Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No. 33-64801,
filed on December 7, 1995).*
-43-10.25 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Davidson & Associates, Inc., CUC International Inc. and
Stealth Acquisition I Corp. (filed as Exhibit 2(a) to the
Company's Report on Form 8-K filed March 12, 1996).*
10.26 Amendment No. 1 dated as of July 24, 1996, among Davidson &
Associates, Inc., CUC International Inc. and Stealth Acquisition
I Corp. (filed as Exhibit 2.2 to the Company's Report on Form 8-K
filed August 5, 1996).*
10.27 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Sierra On-Line, Inc., CUC International Inc. and Larry
Acquisition Corp. (filed as Exhibit 2(b) to the Company's Report
on Form 8-K filed March 12, 1996).*
10.28 Amendment No. 1 dated as of March 27, 1996, among Sierra On-Line,
Inc., CUC International Inc. and Larry Acquisition Corp. (filed
as Exhibit 2.4 to the Company's Report on Form 8-K filed August
5, 1996).*
10.29 Amendment No. 2 dated as of July 24, 1996, among Sierra On-Line,
Inc., CUC International Inc. and Larry Acquisition Corp. (filed
as Exhibit 2.5 to the Company's Report on Form 8-K filed August
5, 1996).*
-62-
INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
----------- ------------ ----
10.19 Agreement and Plan of Merger, dated as of February 19, 1996, by and among Davidson &
Associates, Inc., CUC International Inc. and Stealth Acquisition I Corp. (filed as
Exhibit 2(a) to the Company's Report on Form 8-K filed March 12, 1996).*
10.20 Agreement and Plan of Merger, dated as of February 19, 1996, by and among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition Corp. (filed as Exhibit
2(b) to the Company's Report on Form 8-K filed March 12, 1996).*
10.21INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
- ----------- ----------- ----
10.30 Registration Rights Agreement dated July 24, 1996, among CUC
International Inc. and the other parties signatory thereto (filed
as Exhibit 10.1 to the Company's Report on Form 8-K filed August
5, 1996).*
10.31 Agreement of Sale dated July 23, 1996, between Robert M. Davidson
and Janice G. Davidson and CUC Real Estate Holdings, Inc. (filed
as Exhibit 10.2 to the Company's Report on Form 8-K filed August
5, 1996).*
10.32 Agreement and Plan of Merger, dated as of April 19, 1996, by and
among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp. (filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1996).*
10.33 Form of U.S. Underwriting Agreement dated October 1996, among CUC
International Inc., certain selling stockholders and the U.S.
Underwriters (filed as Exhibit 1.1 (a) to the Company's
Registration Statement on Form S-3, Registration No. 333-13537,
filed on October 9, 1996).*
10.34 Form of International Underwriting Agreement dated October 1996,
among CUC International Inc., certain selling stockholders and
the International Underwriters (filed as Exhibit 1.1 (b) to the
Company's Registration Statement on Form S-3, Registration No.
333-13537, filed on October 9, 1996).*
10.35 Registration Rights Agreement dated as of February 11, 1997,
between CUC International Inc. and Goldman, Sachs & Co. (for
itself and on behalf of the other purchasers party thereto)
(filed as Exhibit 4(b) to the Company's Report on Form 8-K filed
February 13, 1997).*
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
-44--63-